Carol A. Curley, CFA managing director, Golden Seeds, leader of the Golden Seeds Knowledge InstituteFebruary 8, 2018
Angel investing is not for the faint of heart. It’s not for the risk-averse investor, nor is it for someone who’s only in it for the money.
Many people become angel investors to have a front row seat at innovation in many industries. It is interesting to learn about trends and to meet the inspiring entrepreneurs who are leading the way. It is also a great way for angel investors to use their skills, capital and networks to support these exciting companies.
However, angel investing takes patience. You need to be prepared to be in it for the long-haul. But there’s something else you need. The best investors all have one key trait in common — they’re educated investors.
Here are five reasons why an educated investor is the best investor:
Make no mistake — early-stage investing is uncertain, and angels understand that. Many early-stage companies fail. According to an academic study of American angel investors, angels lost some or all of their investment money in 52 percent of investment deals. Why? The companies went out of business. While angels can mitigate risk by joining networks with reputations for stringent due diligence, they cannot eliminate that risk altogether.
Angel investing is an exercise in endurance. According to the Angel Capital Association, the trade association for angel investors, it takes experienced angels at least 10 investments to make a return. In addition to the potential investment returns, angel investing provides a unique platform for engaging with the companies in your portfolio, which is not the case when investing in public markets.
Early-stage investments are highly illiquid. Investors must assume that if they do realize a return on their investment, it will be at a time when the company is sold or goes public. The investment holding period is at least four-and-a-half years, with bigger wins commonly taking nine to 10 years, according to the 2016 HALO report by the Angel Resource Institute.
I mentioned you’re “in it for the long haul,” right? Since this is a long-term commitment, it’s most successful when expectations, priorities and interests are aligned. Remember, the real work begins after you write the check.
In angel investing, it’s critical to understand why something is a good product or service, as well as determining if the team can execute and scale. Much of this is evaluated during due diligence (before the investment), but some will not become fully apparent until after the investment.
If you agree with the following statements, you might want to consider becoming an angel:
•The hard work on an early-stage company begins after the check is written.
•The most effective angel investors bring more than just capital.
•Angel investing is not a spectator sport.
•Failures happen early, while successes take much longer to build.
•Great ideas without execution are just ideas.
•Not all great companies are great investments.
Learn more about the Golden Seeds Investor angel network.