Within the traditional private equity investment model, you start the evaluation process with an introduction. This leads to further evaluation and a commitment of time on the part of the investor to really get to know the management team and to learn a great deal about the business at hand. The due diligence phase and negotiation of investment terms follows, leading to the consummation of the investment.
An introduction can come from many different sources, each of which has its pluses and minuses.
Friends and Family – Entrepreneurs are encouraged to pursue seed funding through “friends and family.” It is a generally accepted premise that the people most likely to provide seed capital are those who have some connection with the founders or key management of the company. Someone familiar with the founder(s) and management team will consider subjective factors such as work ethic, experience and character as part of the decision to invest in the company. Generally, they are making a subjective decision and want to find reason to invest rather than not invest. On the other hand, a “stranger” to the founders and management team will rely much more on the business plan and financial statements as the basis for his/her decision. They will be in more of a position to make an “objective” decision and decide to invest based on the business merits. Since they are considering many opportunities at one time, they will look for flaws that will be the cause of them to pass on the investment.
Intermediary – If you are a serious investor who is or intends to be in the business of investing, you will increasingly rely on intermediaries and advisors to screen deals and assist with the due diligence and minimize the subjective, emotional part of the decision. An intermediary may be a lawyer, consultant or other professional service provider. The capital seeker may choose a lawyer who is perceived to have access to funding sources as part of the “value add” for working with that law firm. Similarly, a consultant or other professional, who may be engaged to develop a sales strategy, financial models or any other aspect of building a company that can be outsourced, may offer to help in the funding process, as a value add. If you are introduced to the company through this type of resource, you can use your knowledge of that resource, the caliber of work he/she provides, his/her trustworthiness, your knowledge of his/her other clients, etc., which provides better knowledge from which to proceed in your evaluation of a particular private equity opportunity.
Deal Events: Sort of like speed dating for investors, fast pitch events are popping up all over. A room full of investors get to get a snapshot of what a company is all about in 90 seconds. From there they are to make a decision to track down that company and make an appointment to see them. For most investors, it is simply entertainment. For the entrepreneurs it is a way to begin to create the buzz so that when a trusted intermediary or friend makes an introduction in the future, the investor can at least say… “you know I think I saw you at XY event.”
Venture Conferences on the other hand give a company an opportunity to take 10-15 minutes to describe their opportunity in greater detail. Investors usually take the first 90 seconds to decide if they want to listen for the next 10 minutes, and in that time to decide to they spend another hour with the company or not.
GroupThink: Investors that are serious about angel investing, but may not have the resources to do the full evaluation on their own or value the input of others from other walks of life, experiences and knowledge of deal making, find value in joining an angel group. Although there is usually a large ticket price to participate, they get the value of saving time and money in developing deal flow and in the initial vetting of the deal. The group usually has a screening process to weed out the non-starters from the ones with some wings to fly.
WHY be an Angel Investor: High Networth men and women decide to get involved in angel investing for a variety of reasons…
1. personal success in building a company or being a part of a successful exit in a company gives them the burning desire to help another company succeed and participate in that process.
2. greed and desire to create untold wealth can only be realized through entrepreneurship and they realize they increase their odds by owning a piece of multiple companies that have the potential to be BIG rather than putting all their money and efforts into one dog that may or many not hunt at the end of the day.
Biggest RoadBlock for the Passive Investor: Ironically, although the SEC has a mission to protect investors by regulating the how information is shared by public companies when investors need to decide to buy that stock and by private companies in the information they are required to provide to communicate the inherent risk involved in making that investment. Reality is that for the high networth person that has moved in sophistication beyond real estate investing or trading on options and creative margin trading in the public markets, or just wants to diversify into private equity investing as an asset class, they are VERY limited on who they can go to to get needed counsel on finding good deals and vetting those deals. The person they have trusted to manage their money on the stock market, IRA, and retirement planning, has been told by the SEC: DO NOT advise your client on private equity transactions unless you personally stand to gain financially for that trade by collecting 5% or 10% of the money the investor invests. And if we find out that you have been providing advice to your client about angel investment opportunities to help them protect their overall portfolio, then we will call that Selling Away and revoke your license and ability to make a living in your chosen field of work.
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After the deal has been identified, then the courtship begins. This is when you get to know the management, begin due diligence to determine if all they say is true or has merit. Ultimately an investor decides to marry the deal because there are like minds, belief in success and the terms match the requirements of the investor from a long term wealth creation and preservation.
More info on the process of becoming an angel investor can be found at:
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