How to become an angel investor: An insight
“How to become an angel investor? And more importantly what is an angel investor?” my friend asked. So I said, let me tell you a story.
Once upon a time, Katy had an idea to set up a new business. But, like many other innovative minds, Katy did not have much money to fund her idea. To make her idea into a reality, she needed a blessing, a blessing of an angel investor.
So she found herself an angel investor who provided her with the initial money she needed to kick-start her idea in exchange for equity in the business. The business went on to become a whopping success and both Katy and the angel investor made good money.
Katy’s story shows the best-case scenario of how to become an angel investor. Every story of an angel investment doesn’t necessarily come with a happy ending. This is because no one can guarantee the success of a business idea.
But, if you go slow, choose the avenues wisely and follow these basic tips, you too can start small and become an accredited angel investor.
Why should you start small?
Every new business idea can seem enticing. They all appear to be ground-breaking and every person seems to know how to change the world with their idea, but to become a successful angel investor you need your money to make returns.
Like any other investment, there is a risk attached here. Therefore, to make the best out of your money, it is advisable to diversify your portfolio and divide your risk. Instead of one fat check to a single start-up consider investing small amounts in different businesses.
The secret of becoming a successful angel investor is to remember that one good investment can cover your losses from up to 9 unproductive investments.
Patience is a necessary virtue
No business becomes an overnight success. Once you put your money in one, you will need to be patient to make it all back. As the business progresses, you can expand your shareholding and increase your percentage of returns.
The underlying rule on how to make money as an angel investor is that you need to be prepared for losses. Therefore, it is advisable to not invest money you cannot afford to lose. Stick to around 10% of your portfolio when investing as an angel investor.
How do you overcome the obstacles of a small angel investor?
A common concern among small angel investors is that they do not have much value in a new business as their contribution in terms of money is less and the need to not become a dot in the flock of small investors.
With too many small investors, a business runs the risk of becoming non-profitable as the decision-making is hampered. This is why they prefer keeping all the power in a few controlling hands. So how does an angel investor make their place even with less money in their pockets?
Businesses do not just need funding. They are often looking for creative ways in which people can contribute to their business. For example, every business requires expert advice on managing the finances of the company.
If you have prior experience in the field you can provide aid to the business with your recommendation and advice. This way an angel investor can get a larger role in how the business functions to become a success.
Some useful tips for angel investors
- Educate yourself:
Before stepping into this world, it is vital to understand its complexity. Do your homework and educate yourself before you invest your money anywhere. Everything you need to know from financial terminology to legal jargon is easily available on the internet.
- Learn from the experience of other angel investors:
Who can be better than experienced angel investors to help you understand how to become one? Consider reaching out to experienced angel investors for practical suggestions. You can also join an angel investors group for acquiring expertise and expanding your network.
- Review all factors of a business:
The common factors that indicate a triumph business are the idea, revenue, costs, and debt. An angel investor must carefully study the expected performance of the business on these factors. This will give a clearer picture of how successful the business can become.
- Pick your niche:
Another important aspect of angel investing is to know which areas you want to put your money in. The important elements to consider are your ready-to-invest wealth, your interests and expertise, and your plans with the investment. The process of elimination is a great starter for picking a niche.
- People maketh the business:
Just as knowing the in-and-out of a business, it is also essential to know the people running the business. Their approach to business, commitment, and flexibility can be huge in determining the worth of the business and where they can take it.
Angel investment can be fun. So, if you have some extra funds that you can invest, you can consider being an angel to someone’s brainchild. After all, who knows, you may be investing in the ‘next big thing’ in the world of start-ups.
It cannot be denied that becoming an angel investor is risky. But, with a careful approach and implementing the aforementioned tips, angel investment is an excellent way to earn high returns.
Moreover, being involved in a business from its nascent stage provides you with a good share in the early gains of the company. You can increase your stake as the company progresses and acquire decision-making positions for the company.
Frequently asked questions
1. How do I become an angel investor with little money?
- The easiest way to become an angel investor with little money is to try the portfolio approach, under which you diversify your investment to minimize your losses.
2. How much should I invest in angel investing?
- As a thumb rule, you should invest about 10% of your total portfolio in angel investments.
3. Can an Individual be an angel investor?
- Yes. An angel investor is typically a high-net-worth individual who provides initial funding to start-ups and businesses in exchange for equity in the company.
4. Is angel investment risky?
- Angel investing, like any other investment, comes with a certain risk. However, these risks can be mitigated with careful analysis of the business plans and adopting a strategic approach with the investments.
5. What percentage does an angel investor get?
- Normally, angel investors earn about 20 to 30% of the return on the money they invest. An angel investor taking up a high risk can negotiate for a higher return percentage.