This question comes up now and then. You may not even realize what you want to do is “angel investing”. Sometimes when sophisticated investors are trying to grow their wealth they will talk about being a “silient partner” or “owning a piece of a lot of differnt companies” or even “loaning some money to a company that is just getting going and then having a little bit of stock after they pay me back”. All of those conditions are variations on angel investing. Very similar to deciding to invest in any new class of asset, when you decide to start investing in private companies you need to do a few things:
- Read up on it. The Learn to Be an Angel Investor series of books (www.learntobeanangelinvestor.com) is a good foundation since it is a compilation of many text book type books on angel investing written for entrepreneurs but interpreted for the investor by the author, years of experience in seeing the decision process in the works by experienced angels, and raw research on the Internet and elsewhere. If you haven’t read Robert Kiyosaki’s, “The Cash Flow Quadrant” or “Rich Dad’s Guide to Investing” then you should. Get access to a glossary. There is one in the Learn to be an Angel Investor series, but you an also look up terms on “investopedia”.
- Attend Seminars and Workshops. Although there aren’t a lot of seminars available regarding angel investing, there is the occasional Conference or panel discussion regarding angel investing. The best one coming up is the Southeast Private Equity Conference (SPEC) in Atlanta on April 28th and 29th (www.sePrivateEquity.org). This conference will have a number of break out sessions of specific interest to investors. Also, you’ll have an opportunity to network with a 100 other investors and to learn from them and their insights. SPEC Talk Radio, every Friday at Noon, will cover elements of the conference and new announcements http://www.blogtalkradio.com/Karen-Rands The first episode contains an interview with SPEC keynote speaker Wes Moss and Karen’s insights into why early stage investing isn’t being impacted by the looming recession.
- Decide the type of returns you want to receive. Just like real estate investing, you need to decide if you want a recurring revenue stream, a “flip” in a few months, or a long term big capital gain. The recurring revenue stream happens when you invest through a royalty financing plan, debenture that pays interest only for a period, or into a legal entity that passes revenue through to owners (LLC, S corp). A “flip” occurs when you provide bridge financing or contract financing that pays you back in a fixed period of time plus high interest, and sometimes has a sweetener with warrants for equity or actual equity. The long term big capital gain is when you purchase the private shares at a low valuation and must wait until the company is bought or the shares are made available for public sale at a higher valuation.
- Determine your annual amount to invest. It is OK to start your first year with the decision to only invest $50,000. You might be able to invest that in two deals and at least hedge your bet by having two that might hit or offset a loss in one. But, if you emotionally plan to invest $50,000, you should have the ability to actually invest $200,000. Most angel investors allocate a portion of their portfolio or plan that as one class of asset liquidates (real estate for example) they will move that money into private equity to facilitate the diversification. Or if they are an executive in a company. a partner in a law firm, or sales executive, then they may allocate their corporate/sales bonuses to go into private equity. Once you are comfortable with the process, then progress up so you can be making multiple $50,000 investments in a year. Then when one of those hits, you can diversify that return into private equity AND a long term, moderate risk asset.
- Gain access to high volume, quality deal flow. The reason you want high volume (not hundreds, but dozens) is so you have choices. If you only get to see deals your close circle refer to you, then you are limited in the variety of industry, stage, and type of offering. Or if you only look at deals your accountant or lawyer brings to you, then you eliminate the potential for the “wow” factor. Sometimes you see an entrepreneurs presentation and go “wow!”, but it doesn’t have the strict industry or stage that you told your lawyer you wanted. You would have missed that deal. You want to know about deals your friends are investing in so you can also participate with them, assuming you trust their judgement. However, by belonging to an angel investor club, you gain access to a volume pre-screened deals. This will save you time by your not having to personally do the initial read on the plan to see if it has merit or meet individually with a company until you want to consider that opportunity seriously, and you have the variety necessary to cherry pick the best deals. Ideally you can belong to a community with other investors that hold regular meetings in order to manage your time regarding reviewing opportunities and managing your investment budget. Attend private equity conferences, in your region and in other regions that have a national draw. Both the SE Private Equity Conference (SPEC) in April in Atlanta (www.seprivatequity.org), and the tri-annual New York Private Equity Conference in New York City (next is March 27th) put on by Starlight Capital and Segal & Associates (http://events.starlightcapital.com/events_list.asp) will have companies from across the country. Don’t be afraid to invest in a good deal that is outside your back yard, just be familiar with the other local investors and the quality/experience of the management team.
- Narrow your focus on stage and industry. Although you should stay open to every industry and stage so you can maximize your options and ultimate diversification within the class of private equity transactions, it makes it easier to get to a “short list” if you know you don’t want to invest in life sciences or high tech, for example. On the opposite end of that is only belonging to an investment group that invests in one industry like technology or only companies that already have $500K in revenue. Limiting your access to deals to a specific industry makes you more susceptible to economic influences within that industry. The Dot-Bomb had the most impact on investors in the tech sector, not consumer goods or life sciences. Only considering companies that have a half million in revenue is a way to minimize risk because you know the company can at least sell something. However it is a false security blanket. In no way does it guarantee that the company can become a $10M company or get to a liquidity event. And by having that bar, you set yourself up to investing at a higher valuation than a company that is pre-revenue, you may miss out on a deal that goes from angel round (pre-revenue) straight to VC round with $1M in revenue. There are other ways to mitigate risk and ensure the company can execute than having a sizable revenue milestone as the mark.
- Finally, don’t go it alone. If you aren’t in an angel investor network or club, then make sure you at least have 2-3 other friends that want to invest in private companies so you can have others that you can use to help evaluate the deal and won’t be evaluating from a pure financial or legal aspect but because as business people and sophisticated investors, they have the potential to co-invest.
Hope this helps. Just like doing anything the first time, there is a certain risk of the newness and uncertainty and then the thrill of actually doing it. First Love, First time riding a bike, first time traveling out of country…..first time making a private equity investment. There may be pain along the way, but the journey and the end result when it works is worth every bump or bruise.
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