So you’ve seen Shark Tank (Dragon’s Den in the UK), and you want to call the shots. Where to begin? Having started this journey myself a little while ago, I can recommend a number of resources and bits of advice (which you may or may not find helpful!) to get you started on your journey.
Where to start
First, I would highlight two books: “Angel Financing for Entrepreneurs” by Susan Preston and “Winning Angels” by David Amis and Howard Stevenson. Also check out my previous posts, “So What Do I Put In a Pitch Deck?!” for a useful due diligence checklist as you read and listen to pitches and “Was It Something I Said? Angel Pet Peeves to Avoid” to detect red flags in entrepreneur presentations.
Now that you’re armed with information, let’s deal with practicalities… Accredited Investor Status – Do a quick online search to see if you legally qualify to be an angel investor. This is risky stuff. These investments are illiquid, lack the transparency you see in the public markets and have a higher rate of failure. Don’t become an angel investor unless you are comfortable potentially losing money! Of course, there’s potential to make a lot of money too, but you should only proceed if you legally qualify and are fully knowledgeable about the risk involved.
Two of the most important determinants of startup success from an angel’s perspective are 1) the amount of time spent on due diligence before the investment and 2) the amount of time spent helping the company post-investment.
Decide how you involved you want to be
Passive - If you’re like most people, you have full-time job! You may not be able to spend a lot of time on a daily basis with entrepreneurs, but you still may desire exposure to this asset class. If the idea of picking start-ups for your portfolio with minimal involvement afterward and/or committing capital via lead investors who choose the startups appeals to you, then equity crowdfunding is a great place to start.
Equity Crowdfunding - There are a lot of websites which address this market: SyndicateRoom, CircleUp, SeedInvest, AngelList, MicroVentures, etc. These sites allow you to register your profile and sort startups by sector and geography, amongst other criteria. You can invest in companies directly and/or invest in a syndicate (where a lead investor chooses the deals for you to create a diverse portfolio). Most platforms don’t charge you for access, and they provide you with a lot of investment choices. They also streamline the investment process so that you can access many of the relevant company documents in one place and see what other investors think about the company.
Active – Two of the most important determinants of startup success from an angel’s perspective are 1) the amount of time spent on due diligence before the investment and 2) the amount of time spent helping the company post-investment. If you have the time and inclination to be helpful to entrepreneurs, your guidance and advice will likely be well-received! Mentoring entrepreneurs can be incredibly fulfilling, but you should be prepared to be responsive, open your network to them, provide strategic advice, and participate in formal meetings (e.g. Board of Directors, Advisory Boards), if applicable. Active angels often join local angel networks to work on deals and invest together.
Angel Networks - Check out the Angel Capital Association’s website for a member directory of angel groups in your region. Joining a local group gives you a sense of camaraderie with other angels, but more importantly, you can learn a lot by performing due diligence with your colleagues. Together, you can lead deals, negotiate investment terms, and work together with the company post-investment. Local networks often play a big role in the startup ecosystem too by providing guidance and feedback to entrepreneurs even before the fundraising process begins.
What else should I know?
Get a good lawyer! In all seriousness, no one enjoys paying legal bills, but a good lawyer is worth his/her weight in gold. Make sure you get solid advice from a trusted advisor before signing anything. Don’t be penny wise and pound foolish as a little preparation now can really protect your interests in the long run. You should also make sure your accountant understands the tax ramifications and completes any filings necessary on your behalf.
But most importantly, don’t forget to focus on the most important aspect of the investment decision: the entrepreneur! All too often, we can get enamored by a great idea, but if the entrepreneur isn’t remarkable, the business may never take off. Plus, if you have a great relationship with the entrepreneur and believe in him/her, then you won’t panic if/when the business pivots! Invest in the person and team. Put your money behind someone with incredible potential, and hopefully you become an integral part in making their dream a reality and building a spectacular business.