Monday, May 14, 2012

3 Reasons to Become an Angel Investor

Entrepreneurship is exciting; investing in entrepreneurs is exhilarating. And the press has started to notice. Now, local communities are pushing their success stories, and in many cases, there’s a bit of a frenzied market to run programs or support services for entrepreneurs. In short, we’re in an up-cycle. Entrepreneurship is occurring, and the environment into which entrepreneurs are launching their businesses welcomes them to the game and encourages their ideas, growth, and products. And this is excellent.

This is one way innovation occurs. We need entrepreneurs to go out and start something, to build a company and to innovate new products, services, and technologies. Entrepreneurship is happening. It’s incredible to see the investment so many regions are making in their entrepreneurial communities. The Triangle isn’t different. Our community is evolving, growing, and innovating

Entrepreneurial communities require three fundamental items—beyond the entrepreneurs themselves—in order to grow and expand. First, they require the support organizations, like CED, to facilitate connections, provide mentorship, provide training, and host community events. Second, they require talent. A community cannot grow without constantly attracting and retaining talented individuals. Third, they require a funding environment. This is what we’ll discuss today. 

It’s Never Been a Better Time to Become an Angel Investor

With the economy on the rebound and entrepreneurship a central focus for growth within small, medium and large cities, angel investment is a fantastic way to create additional wealth. An angel investor provides early-stage or seed-money to entrepreneurs and their startups in order to facilitate early growth. Angels choose to invest as little as $10,000 in promising companies, generally before the company is wildly successful. It’s a gamble, sure, yet angel investments can, and often do, yield high returns on the initial investment. Why would you want to become an angel investor?

Angel Investments are a Profit Opportunity

Here’s how this works. An investor finds a startup or entrepreneur in which they are interested in the product, the service, or the people running the company. Assuming the investor believes in the future success of the startup team, a deal is negotiated. In this deal, there are two numbers that matter: the amount of the investment, and the valuation of the company in which the investment is made. This determines the total amount of equity stock the investor will receive. If you put $50,000 into a company at a pre-investment (sometimes called ‘pre-money’) valuation of $1 million, the company is worth $1.05 million post-investment (or ‘post-money’) and you now own .05/1.05 x 100 percent of the company, or 4.76% of the company’s stock.

Now suppose that four years later the company has an exit, either through IPO or an acquisition, of $10 million. Your 4.76% of the company is now worth $476,000. This is the simplified version, of course, because of dilution of stock which occurs if the company takes on any additional investors after your initial investment. Dilution is normal, and even if your stake in the company dropped to 4%, you are still returning eight times your investment. That’s a great return on your initial investment. Of course, nothing is guaranteed, which is why it makes sense to diversify your investments across an angel portfolio rather than betting big on one company. The opportunity for profit is large.

Joining the Angel Investing Community Makes You a Better Investor

My father always told me that the most important part of an investment decision is being positioned to make a quick and decisive decision about the investment. That means being prepared to identify an opportunity or to make a call when an opportunity presents itself. One can’t make a good decision if one isn’t prepared to decide.

Joining an angel investing group allows the whole to be more efficient than the sum of its parts, thus yielding better identification of potential investment targets, a quicker and more comprehensive due diligence process where the startup is considered, and access to potentially larger deals. The community of angel investors is a lot like you: smart, lucky, passionate, persistent and capable. An angel I often work with describes the angel community as “a positive interaction off the golf course,” by which he means that business gets done, and market knowledge is shared. Angel investing is, in many cases, an educational opportunity. Who wouldn’t want to become a better investor? The power of the group helps clarify investment decisions, strategies, and portfolios. Sure, there are successful angels who operate on their own, yet the value of an angel investment community is in interacting with your peers.

Angel Investing is Tons of Fun

What are you passionate about? In what areas or industries are you an expert? Angel investing gives you an immediate tie-in to the emerging innovations within that area or discipline. Your active involvement in the startup community yields first-looks at new and emerging technologies, local entrepreneurs, and potential deals. And this is really quite fun.

In addition, once you make an investment, you get to be a part of the development process for that company. You’re involved—maybe not in the day-to-day, yet you get to work with the technology or innovation about which you are passionate, and work beside a team in which you fully believe. If you’re only considering angel investment because it is an opportunity to earn revenue, you may want to reconsider. The most successful angel investors are the ones who truly enjoy the companies in which they invest, love and use the products or services that the company develops, and takes an interest in the successful development of the people on the team (particularly the entrepreneur).

Successful angel investing is a vehicle for continued revenue growth. The key word in that sentence was “successful.” Angel investors who perform well are prepared, trained, and connected to the community. They are, as my father may say, positioned well to quickly make an investment decision. They’ve put the work into understanding their investment strategy (might I recommend “invest in what you know well”), the types of companies in which they are interested, and how to diversify their angel portfolio to maximize potential results. How do you become successful? An investor becomes successful by doing many of the items that put them in the position to become an accredited angel investor in the first place:  working hard, networking, learning new skills, building a community, and staying involved.

Have you considered angel investing as a mechanism for revenue growth? Intrigued by the discussion points in this article and want to learn more? CED is offering an introductory seminar on angel investing on May 23, 2012, which will teach you how to become a successful angel investor and introduce you to the angel investing community. You made it this far in the article—you’re clearly interested—why don’t you register today?

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