Angel investment is a form of equity financing–where the investor supplies funding in exchange for taking equity position in the company. This type of financing is normally used by startup companies or non-established businesses that do not have sufficient cash flow or collateral with which to secure business loans from financial institutions and banks. Angel investors fill in the gap between the small-scale financing provided by family and friends and venture capitalists.
Angel investors are typically individuals who have spare cash available and are looking for a higher rate of return than would be given by more traditional investments. An angel investor typically looks for a return of around 25 to 60 percent. While it looks like a very high benchmark, it is not.
A 300x return is pretty much par for the course.
The biggest disadvantage is that angel investments are risky. Unlike a loan, invested capital does not have to be paid back in the event of business failure. Most angel investors are savvy enough to understand business cycles and take long term views. The biggest advantage for angel investors is the control he or she has as a part-owner of the company. The angel investor has a say in how the business is run and will also receive a portion of the profits when the business is sold.
Angel investments normally come from:
- Family and friends: This is by far the most common source of funding for business startups that are interested in finding business start-up money and is the only option for many. Given the high rate of failure with new businesses, it is also risky in terms of the possible impact on relationships if the business is not successful. It is important to be upfront about the risk of failure.
- Wealthy individuals: Another good source is successful business people, doctors, lawyers, and others that have a high net worth and are willing to invest in return for equity. More often this is done by word of mouth through business associates or associations.
- Groups: Angels are increasingly operating as part of a syndicate which raises their potential investment level accordingly. Investors contribute funds to the syndicate and a professional syndicate management team chooses the investments
- Crowd funding A form of an online investing group whereby startup companies and individual entrepreneurs can raise funding through social media platforms by having large groups of individuals invest amounts as small as Rs 10,000.
Be very clear: Angel investing as an activity is great. When the right people do it the right way, great companies are created and everyone wins. Success stories of Facebook, Uber, and Flipkart etc. are well documented as classic Angel funded “100X “ ROI and make for great dinner time anecdotes.
And yet while angel investing looks like this casual, easy and fun activity make no mistake about it, if you want to avoid losing your shirt, you need to spend a LOT of time on it: finding deals, vetting companies and then once you invest, working with them round the clock to make them succeed. For every great idea, there are 50,000 bad war stories where capital was lost within a year or shorter. To quote Peter Thiel “if you look at people who have been really successful angel investors, they’re the ones that take bets on founders and ideas that they believe can be huge, and cheerfully lose their money a lot of the time.”
To be a successful angel investor means
- a) That you must invest in a ton of start-up ideas and be cool with watching most fail
- B) Have deep pockets to do both initial investments and serious follow on funding.
Point B is key. Everyone claims that they understand the need for deep pockets in angel investing, but very few people practice it. That is the difference between a 3x and a 300x (or 3000x) return.
The other problem is that there are only a few of these massive home run companies formed each deacde. And a decade is a very very long time. Can you predict, out of the thousands of start-ups launched each year, which ones will be the winners and stay winners? A lot of people think they can. Almost all are wrong.
In conclusion, if you must invest in start-ups, then use syndicates, do it full time and 100 percent, otherwise you’re setting yourself up to lose.
Our two cents is you are better off spending your time and money, learning skills and building the company yourself or even better, joining a start up early and help them on their journey.
We are only at the beginning of the incredible changes coming to our world and, most of the best ideas are still out there. The best opportunities out there are in creating, not investing.
About the Author
Rajiv Goel – CEO Bombay Capital Services, bum in 1968, in Mumbai, in a family of traditional textile traders studied in a local Convent school named “Campion” and completed his Commerce graduation from H R College Initially, first 5 — 6 years he was a pad of the family business following which he started taking interest in the stock markets which were still in a nascent stage in India.
Even before he completed his graduation, he started his own Sub-Oolong business in the Bombay Stock Exchange using his street smart knowledge acquired through venous sources He learnt the ground rules of the business in the era of Harshad Mehta and Ketan Parekh.
In 1995, he established a proprietary company called “Bombay Capital Services “, a financial advisory firm which advises dents on the fundamentals of small savings. These include sublets like PPF, Gold, Equity, Mutual Funds and similar asset Classes.
Based at New Marine Lines, the company has a ten minute proximity from the Churchgate and V.T stations making it convenient for the client to access. Over the past 20 years, the company caters to more than 1000 dents including HNI’s, Corporates/ Bank, Retail Investors. The company has a dedicated team and research desk which advises clients on Equities Commodities, Forex, Mutual Funds and Insurance. Presently, it has an office in Mumbai and Delhi and plan to open up branches shortly in Kolkatta and Chennai.