As with most things, angel investing requires some preparation. Here are four tips to make sure you … [+]
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So, you’ve acquired some wealth. Maybe you’ve had a six-figure job for a significant amount of time and have been putting away money. Maybe you listened to Suze Orman and didn’t buy the latte. Maybe you listened to Sallie Krawcheck and did buy the latte, but made some smart investments in the market along the way. Whatever it is, if you find yourself with enough money in your savings account that you’re ready to invest some of it, one of the most appealing and exciting things to invest in is smart, hungry entrepreneurs.
But, as with most things, angel investing requires some preparation. Here are four tips to make sure you do it wisely.
1. Invest in the founder over the business.
There is no business that doesn’t have some competition, that’s in total white space, that has the most unique idea to ever hit the universe—and if that business did exist, they probably wouldn’t be seeking angel funds. Everybody has competition, and no idea is totally unique. And everybody can give you numbers. What they can’t give you is the heart and the soul and the drive of a particular founder that is going to be able to push through the challenges of getting a business off the ground. Of course, you have to believe in the business itself, but know that you’re investing primarily in the founder.
2. Be able to clearly articulate the numbers and vision.
In addition to having the grit and resilience needed to run a successful company, the founder (and, ideally, everyone at the organization) should be able to speak to the numbers, growth plans, and vision of the company. Even when they are just starting their business, they should have an understanding of not only what the numbers are currently, but also what they will be in the future. As an angel investor, you should be so motivated by the vision of the business that you’re able to articulate all of this as well. That way, you’re able to sell them to partners, help introduce them to your connections, and play a larger role in making that vision a reality.
3. Be clear about how you can help.
When you’re looking at a business to potentially invest in, it’s important to make sure you have some sort of relevant experience. However, that relevant experience might come in a different way than you’d think. For example, GamerSafer provides technology to help online games and esports platforms defeat fraud, crimes, and toxicity. I’m not in the technology field, nor do I have much experience with online gaming. But, the co-founders of the company are married—and I very much understand the nuances of building a business with your partner. So, I clearly communicated to them that I might not be able to help with contacts in the field of tech, but I can help navigate the other challenges they will inevitably face as co-founders.
4. Only invest what you can afford to lose (but you might be able to lose more than you think).
Out of every 10 startups that raise capital, only 7.5 will succeed. So, angel investing is certainly a risky business. It’s riskier than the stock market, which has a long history to look back on. Some might argue it’s even riskier than something very volatile like Bitcoin. When you put money into an angel investment, you don’t know when you’re going to get it back—but you’re betting on the long haul of that entrepreneur. So, you have to develop the mindset that, when you invest, the money is gone.
For those who are more risk-averse, that will be the most challenging part of this. It’s not easy to take a portion of your own wealth or savings and put it into businesses that you have virtually no control over. However, just having the financial ability to get involved in angel investing is a massive opportunity. Black and Latinx women combined received just 0.64% of total venture capital investment between 2018 and 2019, and only 2.7% of venture capital in 2019 went to female-only founding teams. There is a huge funding gap for these underrepresented groups. So, seize the opportunity. Take a chance on building something bigger. Because when you invest in businesses with heart and hunger and grit, it won’t only pay off for you in the end—it’ll pay off for the world.
