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Top Five Startup Investment Strategies for Angel Investors

Most Common Mistakes By Angel Investors

Prab Premkumar

Founder, StartupsNext

When it comes to venture investing, it is important to always remember that there are a lot of risks and uncertainties involved with the profession, your goal as an angel investor is to understand these risks and find the best way to minimize them while still actively searching for and investing in the best startups with the highest probability of succeeding long term.

 

But in order to find these next big winners and achieve this level of consistent success in your investment journey, there are a few common mistakes you most avoid making as an angel investor. And in this article, I will be talking about the three most important ones and the effects they have on your investment portfolio.

 

1. Investing in A Business Idea You Don’t Understand

One of the greatest investors Warren Buffet always says “investing in a business you don’t understand or know anything about can only spell doom for your career” this saying also stands very true for angel investors investing in any startup.

 

Having a systematic approach to your investment is very important for you, it is also very important you take the time to carry out extensive research on the business side and growth potential of the startup you want to invest in before pulling the trigger. Finding answers to questions like:

 

  • What is the long term outlook for the business idea?
  • Is there a clear vision as to what the company plans to achieve?
  • What is the customer reception like for the products or services?
  • Is the startup well situated to compete with or outperform competitions?
  • Will the products or services being offered remain relevant in the long run?

Ignoring to ask questions like these in order to truly understand the kind of business startup you are investing in and their long term outlook will only lead you to constantly picking bad startups with no clear growth path.

 

2. Investing More Funds Than You Are Comfortable With

While you might get lucky to find and invest in a startup that gets lunched immediately and gives you a chance to exist with huge profits, things typically don’t go like this and might take a lot longer before the startup actually becomes profitable.

 

Understanding this huge time constraint is important when it comes to planning your investment. Investing more money into a startup than you are willing to get tied up over a long period of time can lead you to making huge mistakes and taking very bad steps in a bid to get back your equity. This could also lead you to liquidating your positon early or taking profits prematurely instead of waiting for the home run.
In order to avoid this and remain systematic in your investment decisions, you must take steps like:
• Taking a portfolio approach to your investments
• Predetermining how much you are willing to invest into any startup
• Deciding on how long you are willing to hold unto any unprofitable investment in your portfolio

 

3. Not Researching About the Businesses Model or The Management Team

While the business idea might be perfect, it is important you take into consideration the business model and the management team that has been tasked with the job of bringing this idea to reality. One of the most common mistakes angel investors make is ignoring the importance of the role of these management team and how having the wrong people in the position can only lead to a failed startup no matter how brilliant the business idea is.

The same can also be said for having a bad business model. Your goal is to find the best startups with the right people in the right positions and the optimal business model that would only help them accelerate growth and success long term.

 

4. Ignoring Diversification and Using Up All Your Investing Ammo at Once

The concept of diversification is very common among investors, but what those it truly mean for an angel investor?

Well as an angel investor, the fact is that you will over time invest in a lot of company that do not go ahead to succeed. Having the funds and investing ammo to invest in the next startup that as a profitable outlook is the only way to finally find that big runner that wipes out your losses and brings huge returns. But in order to stay in the game long enough to find these big winners, you need to be properly diversified and not investing all your available funds into one startup at once.

In conclusion, investing in startups is a journey that takes time but only favors the diligent investors who avoid falling prey to the numerous mistakes that plague the profession. So take your time to learn about these numerous risks and mistakes and find the best way for you to avoid and overcome them in order to achieve consistent success as an angel investor.