Becoming an angel investor can be a daunting prospect. You may have plenty of experience on the other side of the deal but it’s a totally different ball game in the investor’s seat.
As you might expect, it’s not as simple as handing over a check to a company you believe in and watching it grow. There are so many factors to being an angel investor, both before and after parting with your cash. Here are some top tips for any aspiring investors from our CEO, Roei Samuel, who has experienced what it’s like to be both a founder and an angel investor.
1. It's a people business
Of course, it’s highly important that the business you’re investing in is scalable; that you have an idea of the competitive landscape/market needs; and that the plans and models for the business are provable. But less quantifiable aspects of the business are just as important.
You need to understand that when investing in early-stage businesses, it’s a person you’re backing. The company may be the ship, but the founder is steering it and the first thing to check is if they’re steering it in the right direction.
You’ve got to make sure the person you’re investing in is going to push the company forward and seek external help when it outgrows his/her capabilities. Before you invest, conduct thorough due diligence on the individual as well as the company itself.
Personality is important. Is the founder passionate? Do you believe in their vision? Is it something that resonates with you? Will they be able to inspire their teams and impress further investors?
Don’t just stop at the founder; look at the entire senior leadership team, their expertise and whether they’re the right team to be pushing the business further.
If you believe in the right people instead of focusing only on the right business, you know that if their first venture fails, or even if their second fails (as is often the case in the startup game), backing them will still pay off in the long run. But if your faith was solely in the business and it fails, you will have reached a dead end.
2. Be the expert
In the research process, make sure any company you’re considering investing in is in an industry you at least understand, but is ideally one you have plenty of experience working in yourself.
If not, conduct thorough research on the industry before investing. It’s important to know competitors, the buying cycle, even the regulatory landscape (if relevant). This not only gives you greater clarity on what you’re investing in, but it also means you can provide informed, relevant support to the founder.
3. Offer more than cash
While a fundamental aspect of investing is putting money into a business, you should consider what else you’re able to offer. Consider the connections you have and who may be a prospective buyer for the company. Offer advice on how you dealt with difficult and unexpected issues. Provide industry insight (if you have it).
Being as hands-on as possible will protect your investment, and it may also present an opportunity to receive remuneration for your efforts as the business grows.
4. Minimize risk
Investing is a risky game. Do what you can to minimize the amount of risk you take on, diversify your portfolio and invest in lots of companies. Casting a wider net is a better strategy than going ‘all in’ on one company.
Another great way to minimize risk is to see investments as losses initially. If you view the check you sign as a payment, something you will not get back, you won’t overinvest and you’ll treat investments very carefully.
Although startups are often considered risky due to such high failure rates, they are not a part of traditional asset classes like the stock market or property investments. That means that when the markets are in turmoil (as they have been recently), startups are not as risky.
Angel investors are more likely to invest in startups so that they can avoid the pitfalls that VCs may face throughout a recession.
5. Step back
As a first-time investor, you’ll feel like you need to control the business you’re investing in. But that’s not how it works. This industry runs on trust. If you’ve done your due diligence on the founder and you trust them, you should feel confident that they’re making the right decisions. That being said, still try to always be available and aim to add value beyond investment whenever you’re asked or invited to - but also whenever you see the opportunity.
Of course, even with trust, you need to make sure the terms are set out appropriately, but terms will not help you if you don’t trust them to begin with.
It’s not easy being a first-time angel investor, but these five simple tips should put you on the path to success. Finally, a great tip is to find potential investments through the Connectd platform. Our smart-matching technology will help you find the companies and founders best suited to your requirements and expertise. Join our investor network for free today