To get a good return on your investment as an angel investor, you must be aware of a couple of things.
You must know yourself – what works for you. You must also accurately evaluate your opportunities before investing.
In other words, you must have a strategy yourself before succumbing to the lure of a company. The risks are enormous.
Yes, your strategy must take into account the risks of angel investing.
You need understand your own risk tolerance and how you’ll diversify your investments. So you need to analyze what’s important to you.
You’ll need to know your priorities as an angel investor – what kinds of companies in which you’ll want to invest.
You might want to invest in only for-profit companies. If you’re altruistic, you’ll want to also consider investing in nonprofits or socially responsible companies.
Actually, it’s a good idea for your self-satisfaction and self-esteem and for motivation to sustain your angel-investing passion.
Other possible priorities
Perhaps you have a personal attraction for certain industries or geographic locations. Or you might thrive on helping to build startups, helping graduates from your favorite college, mentoring young entrepreneurs, or simply keeping your business acumen sharp.
In moving ahead as an angel investor, determine how much of a percentage to invest. Many angel investors typically allocate 3 to 10 percent.
A lot hinges on how much money you have and where you are on the scale of accredited investors. By the way, it’s a good idea to familiarize yourself with the U.S. Securities and Exchange Commission; in particular, the section on accredited investors.
It’s best to diversify because most startups fail. That means investing in 10 different companies.
In terms of additional funding rounds, bear in mind you’ll probably need to add to your investments in the companies.
So devote an equal amount of money to each investment and be prepared to double each of them later.
But stay focused and disciplined. Don’t let anyone persuade you into investing more than you initially planned.
Don’t jump in all at once. Invest in just one or two investments at a time. This will allow you time to get adequately involved in each of your investments.
It will also give you time for more research and due diligence, and to learn. Attend angel investment workshops and read everything you can.
Note: It’s important to thoroughly understand the startup’s business model before looking at its financials – know the strategies designed to successfully launch the startup and to operate it for a profit.
That means asking the right questions for the right answers in order to forecast the ROI of your investment.
Obviously, you need to look intensely at how the startup will make money. Moreover, you need to accurately forecast the company’s growth and to evaluate its exit strategy.
For the entrepreneur’s sustainability, you should pay attention to at least five key areas:
— Look at the company’s growth plan along with the market economics for the company. A SWOT analysis if you will – the strengths, weakness, opportunities and threats – for the company’s sector and the firm itself.
— In examining the financials, understand the break-even point, consider the margins – all costs and the selling prices leading to profits. Have a keen awareness about the anticipated costs associated with scalability.
— Consider the company’s internal situation – the team, human resources, operations and technology. What are all the pros and cons?
— Look into the approach for customers – how the startup will land customers, retain them and support them for repeat business.
— As for leadership, make sure you’re confident in the entrepreneur’s emotional stability, passion, dedication, competitive spirit, and whether the person is pragmatic.
From the Coach’s Corner, see an angel investor’s tips for increasing cash flow and profits
”The key to making money in angel investing is saying no. You meet with 100 companies and say no to 99 of them.”