If you’re new to equity crowdfunding you’ll no doubt have questions you want answered before you begin investing.
Top of the list will be ones like how do you know an opportunity is worth investing in and which one should you put your money into.
Then there’s the question of how equity crowdfunding platforms actually work and what makes one platform better than another. And, you’ll want to understand things like the difference between A shares and B shares and what needs to happen for you get your money out eventually.
Don’t let all these questions put you off though. It doesn’t take a degree in finance or an MBA to make an investment via equity crowdfunding. Instead, simply learn from what business angels do.
Take a tip from a business angel
When a business angel decides to invest in a company it’s not a spur of the moment decision. Instead, he or she embarks on an investment journey. It takes a little time and effort but it’s what helps business angels make the returns they do.
According to a report by NESTA (National Endowment for Science, Technology and the Arts), a business angel makes an average return of 22% across all their investments.
The business angel investment journey
The investment journey that business angels take involves four key steps.
First there is evaluation. Typically, a business angel will examine various aspects of the investment opportunity such as the product or service, the market, how the business plans to make money, who’s on the team and the financials - both current and forecast.
Next up is investment. On this part of the journey, the business angel will look at the company’s valuation and aspects such as the investment terms.
Then comes the post-investment stage. Here, the angel will want to understand what reports they may get or issues they will vote on.
Finally, the business angel will want to understand what the company’s exit strategy is and the different ways they’ll be able to get their money out of the business.
This is quite a brief summary of the steps business angels take but don’t worry as we’ll cover each of these steps in more detail in subsequent articles.
Why business angels do their homework
Investing in startups and early-stage companies is an adventure - it can be enjoyable but is also potentially full of pitfalls. So, in order to avoid as many of the pitfalls as possible you need to do your due diligence like business angels do.
When an angel does 20 or more hours of research into a company, they reduce the chance of an investment ending in a loss from 60% to 40%. Similarly, the chance that they will get a higher return of 10 times or more their investment increases to 15% (1).
Understanding the whole investment journey and doing your due diligence will help you make better decisions about which startup to invest in. This in turn should reduce the likelihood of failure and could improve your overall returns as well as giving you peace of mind.
So don't be deterred by the unknown. Angels are just everyday people who went through a learning process and you can do it too.
(1) Source: NESTA research report "Siding with the Angels" (PDF)