Most Common Mistakes By Angel Investors
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.
Top Five Startup Investment Strategies for Angel Investors
If you look at the evolution of the startup investment industry from the dotcom bubble era of the late 1990s to date, it’s like things have changed a lot and yet have remained the same. Venture Capital (VC) and Private Equity (PE) still dominate late-stage (Series B, C, and D) funding of startups just like they did back then. They stand alone at the top of the startup investment food chain. So not much change there. Conversely, at the bottom of the chain, Angel Investors (Angels) are no longer the sole players in early-stage startup funding. In fact, their dominance of this space is now threatened by “celebrity” investors, crowdfunding (spurred by the 2012 JOBS Act), and even the so-called “Super Angels”, who straddle early-stage and late-stage startup financing. Consequently, when a startup founder is looking for seed or startup funding nowadays, an angel is not necessarily at the top of the totem pole. What can you do as an angel investor to stay on top of your game? Here are five strategies you can use to become or remain highly visible to startup founders: 1. Join an Angel Network or Group Because there’s strength in numbers, angel networks continue to be the most popular way for angels to see good deal flow. Often localized and sometimes industry focused, angel networks have exploded all over the world as the number of high net-worth individuals (HNWs) have risen sharply. One of the benefits of joining these groups is that you can pool capital (“syndicate”) with other angels to take on large startup funding opportunities you might not have been able to handle with only your money. Another benefit is that you get to share investment risks with others. 2. Invest as a Limited Partner in a Venture Capital-backed Fund If you’re the type of angel investor who’s unable or unwilling to spend time to mentor a startup founder, then you might be better off putting your money in a Venture Capital investment fund as a limited partner investor. Just cut a check for the general partners of the fund, sit back, and they will find and manage investments for you. The downside to this strategy is that you sacrifice some of your returns to the fund manager. 3. Become an Advisor to a Coworking Space Company This strategy might seem like an unconventional way to find startup investment opportunities, but it’s not a moonshot. Coworking spaces are shared offices, and many startups work out of these places while “growing up” to save money. If you can get on the advisory board of a coworking space company, then you’re more likely to cross paths with startup founders. 4. Organize or Speak at a Startup Investing Conference/Seminar Obviously, you can just attend industry events to network with founders and other industry players. But you will get more “visibility” when you speak at an event or better yet organize one. 5. Blog Your Angel Investing Expertise The truth is that all the strategies previously discussed are to varying extents self-advertising: you’re really advertising your expertise as an angel investor to founders and other investors. So why not leverage the biggest advertising platform in the world today to find investment opportunities? Given the very wide reach of the internet, blogging about your angel investing knowledge and experience will help you cast your net wider in your search for opportunities, especially if you’re a niche investor. You never know. One of your blog readers might just be the founder of a startup in your niche.