How To Become An Angel Investor
The Dragon’s Den TV programme has done much to popularise the idea of angel investors (business angels) – experienced business people who put their money and expertise into companies to help them start up or grow to the next level.
If you’ve had a successful business career, perhaps built up and sold a few businesses, then the idea of passing your knowledge on to others can be a very attractive one.
You’ll get more variety day-to-day and great satisfaction from delivering benefits, particularly if you do it as a social entrepreneur – picking startups that aim to have positive effects on society.
But how do you go about it?
There are three things you must have in abundance to be a successful angel investor – experience, time and money.
Experience
A successful business angel MUST have experience of startups, growing existing businesses and selling them on. If they don’t, then the people with ideas who are looking for funding won’t see a reason to pick them.
A true business angel wants to be involved.
So although experience is important, it has to be the right experience.
Ex-Dragon James Caan says he lost all the money he invested in his first startup investment because it was a tech business and he didn’t know anything about the tech sector; he wasn’t aware of the key drivers.
Make sure you’re investing in what you know.
This prior experience also means you’ll be bringing valuable contacts to the table too.
Time
If you’ve sold a few of your own businesses then you’ll have worked out a key principle of business – that if a business can’t survive without you, then it can’t be sold, so it has little value.
This means you should be able to generate the time to help out other businesses.
If you take on too many startup ventures then you may spread yourself too thinly.
This will impact your effectiveness and that will, in turn, impact your investments.
Money
You’ll need a significant sum to invest as venture capital.
You provide your money in return for stock in the business and, in theory, when the company is wildly successful, you can sell all or some of the stock at a huge profit.
In reality, many startups fail.
Providing venture capital is a very high-risk activity.
Angel investors build a portfolio of investments so that the chances of one or more delivering a windfall are raised.
This means that having enough money to invest in just one company isn’t really enough. If you’re able to, it makes sense to gamble with other people’s money.
There are many venture capital funds where passive investors provide cash to a central pot that’s invested in different startups.
It is unlikely though, that you’d be able to set up a successful venture capital fund without either a significant sum to invest yourself (so that your investors see that you are putting your money where your mouth is) or by proving yourself as a successful angel with a significant track record first.
Exit strategies
It’s never too early to decide on an exit strategy for a business, even if it may not come to fruition for years.
As a business angel an investment is going to deliver for you from sales of your shares in the business.
So it’s vital to know where the people you’re investing in are heading with their startup. Will you get a return on your investment when the business is sold?
Or perhaps from a sale of your stock to another investor, either new or existing?
You might want to sell just some of your stock, to take a profit while it’s there but keep in interest in the venture.
Starting out
There isn’t really an owner’s manual to becoming a business angel but there are plenty of books by others – wise business people will know that it makes sense to learn from those who have gone before.
There are angel investor groups dotted around the UK and the world, meeting online or in real life. Google the area where you live for ‘business angel’ or ‘angel investor’ to see if there are groups meeting near you.
The internet will also be the place to find events or initiatives that bring business angels and social entrepreneurs together with startups looking for investment cash.
If you can’t find anything local, try the business people at your regional or municipal council, as they should know what’s happening where.
And finally …
If you’re considering being a business angel, remember that although it’s understood and accepted that you’ll be looking to make money, you must give as well.
Give your time and expertise to the people you have chosen to back with your money and your investments will be more likely to deliver – for them and for you.
Paul Connolly
Paul Connolly has been a journalist for more than 20 years, as a reporter and editor for Argus Media, Reuters, The Times, Associated Newspapers and The Guardian. He has covered Islamic Finance for Reuters in the 1990s. Paul has since helped launch three newspapers, as well as reported from Tokyo, Los Angeles and Stockholm.
