Individuals who invest in early stage companies are often called “angel investors.” Investing in startup companies can be rewarding personally and financially. The return on investment can be quite high for the first investors in a startup that is successful because the valuation of the company is lowest in the beginning — the investors get a larger equity stake for a given amount of dollars invested. Angel investors gain satisfaction from providing strategic advice to the companies they invest in — giving the up-and-coming generation of entrepreneurs the benefit of their business experience and knowledge.
Step 1Decide on industry focus. Select industries that you are familiar with — ideally those you have worked in. The more understanding you have of the company’s market, the easier it will be to evaluate the merits of the company and determine whether you want to commit capital to the deal.
Step 2Decide how active you want to be. Some angels prefer to just provide capital to the companies they invest in. Others want to play a more active role in the planning and management of the company. Assess how much time you have to devote to being an angel investor.
Step 3Learn about how to evaluate startup investments. Join an angel network in your area and learn the steps the group goes through to analyze the companies they have selected as potential investments. Learn about the screening process the group uses to identify the best deals. Participate in the process of reviewing the companies’ business plans and formulating questions to ask the companies’ management teams in meetings.
Step 4Generate deal flow. Create a local network of professionals who work with early stage companies — attorneys, accountants, consultants — to refer companies looking for capital to you. Attend venture capital conferences where investors and companies meet. Keep your focus on your own community so it will be easier to meet with the management teams before and after funding.
Step 5Analyze the investment. Whether you invest on your own or as part of an angel group, do a thorough examination of the company. Don’t rely just on statements made in the company’s business plan. Independently evaluate the market potential for the company’s products or services. Consult with your business associates and solicit their views.
Step 6Retain an attorney whose practice includes securities transactions involving early stage companies. Consult with him during the process of negotiating with the company. The attorney will help you structure the transaction, ensure the transaction is in compliance with federal and state securities regulations, and make sure your interests are protected.
- Make sure you learn as much as you can about the background and prior business success of the company’s management team. Don’t commit money unless you are satisfied they have the capability of making the venture a success.
- One of the advantages of investing as part of a group or network is that you can spread your capital over several deals and mitigate your risk should one of the companies fail.
- Never forget that investing in startups is inherently risky. Set aside only as much capital for these investments as you can afford to lose without it impacting your overall financial strength. Also remember these are not liquid investments. It may take three years or more until you exit the venture and achieve your return.
Author: Brian Hill