7 Tips To Consider Before Getting Into Angel Investing

Introduction

The contribution of angel investors goes beyond just financial support. As an aspiring angel investor, you commit to providing valuable knowledge and experience to startups. Putting your skillset and industry expertise to use, you help the entrepreneur in growing an idea into a sustainable business. As an angel investor, you can have a 20-25% stake in the company to generate revenue from your investment.

Tips For Becoming An Efficient Angel Investor

The process of becoming an angel investor is not easy, but it can be incredibly rewarding. There are many risks and challenges involved in associating with a business at the seed stage. The idea might never succeed or make any money at all, but there could be some great opportunities that you can turn in your favour. Here are some tips that can help you make better decisions when considering angel investing:

1. Well-thought approach: A right investing approach will help you make the most of your investment. You must consider the following when planning to start angel investing:

• Time: Define the time you will be able to dedicate to the business. It is important to have clarity whether you will be actively engaged in the business or passively take part in it.
• Investment amount and strategy: You must have clarity about the sector, technology, or type of business in which you want to invest. The amount of money and duration of investment should also be clear in your mind. Taking calculated risks will help you avoid major losses.
• Source of deals: Evaluate deals only from credible sources. You may intend to find them on your own or join other investors.
• Portfolio: The number of transactions you wish to have with your available funds will determine your portfolio’s diversity. It is an important point to consider, as it will help maintain your financial health.

2. Clear and documented screening process: Successful business deals are often surrounded by a lot of potential pitfalls. You could receive an overwhelming number of pitches and a well-documented screening process will ensure your decision-making process is smooth and quick.

The process should consider the business type, industry, the problem being solved and its impact on society. Consider things like long-term demand, competition, and barriers to entry before putting your money on a lucrative idea.

3. Explain your offering: Any wealthy person can invest as an angel, but you must build your offer around the value you intend to add to the company. Be helpful to founders by sharing information instead of being disruptive. It will help build your reputation as an investor. Assisting with tasks like strategy, marketing, and distribution can be highly valuable as it helps the business grow quickly.

4. Gauge scalability: You would prefer investing in a business that has a larger market opportunity and provides a financial reward. Understand the total addressable market (TAM) of the company before deciding to invest in it. Narrow demographics may become a limiting factor to scalability for even the best business models. Look for companies with a steady ARR (annual recurring revenue) and MRR (monthly recurring revenue). 

5. Assess the team: It is important to have a strong and dedicated team to grow a business. Learn about the other investors associated with the business and evaluate their assessment of the startup’s potential. The background of the founding team and other staff plays an important role, too. Good domain knowledge and skills ensure the team makes calculated moves to respond to market changes. 

6. Co-invest: Joining an angel syndicate or finding a group of experienced investors can be a great way to start your investment journey. You can benefit from their knowledge and even take guidance when making your initial investment decisions. You will also get access to active individuals who are willing and able to help with any questions along the way.

Another advantage of co-investing with other angels is that you are not liable for the entire investment and can even start with limited capital. Different viewpoints will help shape the business well and address challenges faced by the startup. 

7. Back the entrepreneur: The success and failure of a company depends largely on its founder and team. You must realise that you invest in the founder too, and not just the company. Assess the founding team during the screening process for the following traits:

• Passion: The greatest entrepreneurs are relentless in their pursuit of success and never give up. A founder must be passionate about his startup. Look for people with drive and determination to make the business a success.
• Strategic thinking: The founding team must have a well-defined go-to-market strategy that they execute confidently, even during adverse conditions.
• Customer-centricity: The best business owners know how important it is not to focus on just making money. It is imperative to keep customers happy to build a loyal customer base and improve revenue. They focus on growing exponentially by building lasting customer relations over time.
• Relevant experience: The key to success in any industry or business sector is having expertise. Before making a decision, consider the founder’s previous experience and track record.

Risks To Consider When Venturing Into Angel Investing

Angel investing involves as much risk as gains. An entrepreneurial study by IBM Institute for Business Value (IBV) shows around 90% of startups fail within five years of their establishment. The survey also reports that 77% of startups with promising offerings end up failing due to a lack of pioneering innovation. You must invest wisely and diversify your portfolio to mitigate the risk. Experienced angel investors prefer investing in multiple startups across different industries to counterbalance the failure of one venture with the success of another.

Wrap-up

Angel investors often take a hands-on approach to nurture startups and new business ideas to turn them into profitable businesses. By keeping a close tab on the startup’s affairs, you become involved in the decision-making so the invested capital can be used appropriately. Beyond being a good source of revenue, these investments offer a satisfying entrepreneurial experience, allowing you to build a business from scratch.

Summary

Angel investors provide expertise and knowledge to budding startups, in exchange for a percentage of their shares for profit. Becoming an angel investor is a risky process, but it can be very rewarding.

The right approach to investing will help you actively participate in the business to make the deal a profitable one. Here are 7 tips to help you start: 

1. Define your approach by deciding the amount you want to invest and the types of businesses you want to add to your portfolio. You must define how much time you will be able to dedicate to the investment without impacting your current engagements. 
2. A well-documented screening process will ensure your decision-making process for business deals is smooth and quick.
3. Outline the value you intend to deliver as an investor, from offering advice to assisting with tasks like strategy, marketing, and distribution.
4. Assess the scalability of the business based on its market size.
5. It is important to make sure the founding team has dedicated members as it widely impacts a startup's potential for success.
6. A group of experienced investors or an angel syndicate could be a great starting point for your journey as an angel investor.
7. The success of a company depends on the founder and his team. Passion, experience, strategy, and customer orientation are all important factors to consider when screening candidates. 

Angel investing can be as risky as it is profitable, so it is important to invest wisely and diversify your portfolio to mitigate the risk.

Investing in start-ups is a good way to make money while staying involved in the decision-making process is a fulfilling experience.

Key Takeaways

• Angel investors provide expertise to startups, in exchange for equity.
• The process is risky but can be very rewarding.
• Have a well-planned investment strategy and screening process before starting. 
• Joining an angel syndicate or group of experienced investors is advisable as you can benefit from their knowledge when making initial investments.
• Angel investing requires taking risks and diversifying your investments to cover up the losses from startups that fail.

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Disclaimer: This communication does not constitute advice relating to investing or otherwise dealing in securities and is not an offer or solicitation for the purchase or sale of any securities. Grip Invest Technologies Private Limited ("Grip", formerly known as Grip Invest Advisors Private Limited) is not registered with SEBI in any capacity and does not advise, encourage, or discourage its users to invest or not invest in any securities. Grip is solely an execution-only platform and does not guarantee or assure any return on investments made by you in any opportunities sourced by Grip and accepts no liability for consequences of any actions taken based on the information provided. Your investment is solely based on your judgement. Investments in debt securities are subject to risks. Read all the offer related documents carefully.