Hear Direct from a Financing Source: Where the Money is today for your Business

Karen Rands’ Compassionate Capitalism radio show for entrepreneurs and investors returns to interview a special guest: Tony Erwin of Skyrocket Financial. Tony is an active member of the angel investor community in Atlanta having found fortune from his role in technology IPO and garnered success from sophisticated stock market investments. Now he helps growing companies with additional sources of alternative finance to fuel their growth with debt against assets to augment their efforts in raising business capital. Tune in to learn more about where to find business capital and investor money for your early stage business. www.skyrocketfinancial.com and www.launchfn.com Formerly SPEC Talk Radio.

Listen Now!

Hear Direct from a Financing Source: Where the Money is Today for your Business

Check out these investment websites: www.kugarandholdings.com, www.launchfn.com, www.nbai.net, www.kyrmedia.com, www.myvirtualangelworld.com, www.entrepreneurblogspace.com and www.dothedeal.org

NEW for 2014:  http://NationalNetworkofAngelInvestors.com and http://AngelInvesting101.com

Listen, Learn, Enjoy and Share with a Business Associate!

Bumper Music by Bryan Hunley of New Whyne Music

Lean Start Up Methodology – the new litmus for investment capital

For the experienced angel investors who have cut their teeth on risky investment in ideas and visions, the popularity of the “Lean Start Up Methodology” as a way to start and grow a company may seem revolutionary and the latest craze.  For those business savvy men and women who believe in validating a product and market opportunity before spending R&D money or investing in capital infrastructure, the premise behind the “Lean Start UP Methodology is actually quite logical and practical.

For all those investors who ever thought angel investors were crazy for investing in companies whose only measure of success was how many clicks, or likes, or free users they could attract, there is a saner way to gain the benefits of investing in companies before they go public.  Early stage investors that hale from corporate America and understand the value of strategic planning now can venture into the world of early stage companies who still have relatively low valuations, but mitigate that risk because the company actually knows there is a market for their product and a demand for their product before they ever go to market.   Emerging Growth companies that have grown organically inherently utilize the market validation process of the Lean Start Up Methodology because revenues have been their source of growth capital.

In the Podcast “Business Strategies for Success – Attracting Capital & Customers” http://www.blogtalkradio.com/karen-rands/2014/09/23/business-strategies-for-success–attracting-capital-and-customers

Paul Hoyt and Karen Rands explore the importance and differences between a Business Plan and a Business Strategic Plan.   A business plan is more like a brochure to describe the business, where the strategic plan is a blueprint to be a road map for how the company will succeed in the marketplace.   When looking at a company to consider for investment, the executive summary introduces you to the opportunity at a high level, the business plan provides more detail about the direction and potential, but the strategic plan will show how they plan to actually get that point of success.   Often times the strategic plan is saved until due diligence starts.

Companies at different stages may have varying levels of completeness of a strategic plan.  Start ups simply don’t know enough information to have a great detail in their strategic plan whereas emerging growth companies with a history of performance leads to shifts or pivots in their strategy on how they need to adjust the plan to achieve the results they want and best utilize the capital they are raising.   Regardless of the stage, the company should have some form of a strategic plan that shows how they will use the funds to ramp up staff, implement marketing plans, enhance operations, and increase sales.

The Lean Start up Methodology in effect creates a corporate environment that is living the market responsive strategic plan.  Fundamentally it is an approach that embraces improvising, adapting and implementing – measure and repeat.

Check Out Entrepreneur Podcasts at Blog Talk Radio with Karen Rands on BlogTalkRadio

 

For more information about Paul Hoyt and his Beyond Business Services visit http://paulhoyt.com
For more information about Kugarand Capital Holdings and the educational programs for investors and the due diligence portal for emerging growth companies, visit http://kugarand.com

Compassionate Capitalist – Angel Investing When You Don’t Have Cash on Hand

Often I’ll hear investors say “That company has real potential.  I wish I had the cash to invest. My money is tied up in….”.

An investor’s cash can be tied up in real estate, traditional portfolio of stock, mutual funds, and bonds and/or 401K or IRA.   Investment real estate isn’t considered liquid because it is either income producing or a long term strategic location.  Although public stock can be sold at the investors request at any time, often an investor won’t want to sell their stocks for many reasons.   It could be that they are waiting for a period of ownership to pass to minimize capital gain taxes, or they are waiting for a market response to announcements that would increase the value of that stock.   Many other traditional portfolio holdings may have a longer holding period before they can be liquidated without penalty.  Furthermore, 401K/IRAs are generally considered to be illiquid because of tax penalties associated with the withdrawal of funds.

However, there are two ways that these investments can be used to make investments in private companies, with certain caveats.

  1. Self- Directed IRA:  By definition, the Self Directed IRA is an IRA that allows the account owner to direct the account trustee to make a broader range of investments than other types of IRAs.  The custodian of a self-directed IRA may offer a selection of standard asset types that the account owner can select to invest in, such as stocks, bonds, and mutual funds, but, by definition, permits the account owner to make other types of investments, including loans. The range of permissible investments is broad but regulated by the IRS.  Mostly the IRS regulates what an investor cannot invest in and leaves the “what can invest in” open ended.   For our purposes regarding private companies, here are the restrictions:
  • Not intangibles : art, alcohol, gems, collectables
  • Not an entity that is more than 50% owned by  the service provider who manages your IRA
  • Nor a partner or JT venture that is 10% or more with an entity that is 50% or more held by the service provider.

For more information regarding Self Directed IRAs, here are two good sources:
http://en.wikipedia.org/wiki/Self-directed_IRA

http://cdn2.hubspot.net/hub/319644/file-395650388-pdf/Email-Attachments/Article_Top10Mistakes.pdf?t=1386019713000&t=1386019713000&t=1386019713000

2. Portfolio Margin Loan:  Margin loans on an investment portfolio have long been used by sophisticated investors with high risk thresholds to expand their investment portfolio by borrowing against the value of a stock in order to purchase another stock that they believe they can profit from before they need to repay the loan.  Taking a margin loan out in order to purchase a private non-traded stock is not as common.   Only a few investment advisory firms have provisions for such uses of a margin loan.  Similarly only a few firms have provisions for securing a margin loan for personal use.   Investors that have substantial portfolio holdings and want to consider use of this asset to facilitate an investment in a private company should inquire about restrictions their advisory firm has on the use of margin loans.   There are  3 ways a margin loan may be used to finance an early stage company:

  •  Margin Loan on existing portfolio to directly invest in a direct public offering.
  • Margin Loan as a personal line of credit with authorized use by the CFO of the target company.
  • Margin Loan with the cash extracted as one time loan.  The investor can then provide that capital in a form of a note with warrants or as a convertible note to the company.

More info on Margin Loans: http://en.wikipedia.org/wiki/Margin_%28finance%29

Sample Rates: http://www.schwab.com/public/schwab/investing/accounts_products/investment/margin_accounts

What the SEC has to say: http://www.sec.gov/investor/pubs/margin.htm

Managing the High Risk

Using debt to finance an early stage company is highly risky.  Most often, if a payment is required, it is an interest only payment based on the loan rate and the principal loan balance.   If the margin loan remains in good standing and the portfolio retains or grows in value, the investor is unlikely to have a “margin call” where they must pay down a portion of the outstanding loan balance.  The typical margin loan cannot exceed 50% of the value of the portfolio and are closely monitored the relationship of the margin loan to the total value of the holdings.

Using a self-directed IRA to purchase non-trading private stock is very risky simply because no one can ever actually predict the success and how much success an early stage or emerging growth company may have.   You cannot declare any capital losses if the company does go out of business.

Given the odds of using all of the investment amount, and having little to no recourse, this strategy should only be employed when the investor has a high level of confidence the company will succeed or the investment vehicle would be a revenue producing structure (see Investing for Residual Income Blog Post).   Consider these precautions when considering using either of these “illiquid” investment holdings to finance, either through debt or equity, a private company:

  1. Do the mental exercise….what if you lost the investment?  Would you be disappointed or devastated?   Disappointed is OK.  Devastated? – Then don’t invest.
  2. Company should be in revenue with a respectable back log of trailing revenue.  In the case of the Margin Loan, you could be the “private banker” to finance a transaction so the time the money is required is shorter than a straight equity investment.
  3. The management must have experience in running a company previously so you have a reasonable expectation that they know what to do to generate revenue and make operational corrections as needed to ensure continued growth.   You can’t afford to babysit or for them to get a life lesson on your nickel.
  4. Ensure they are compliant in every way with the SEC.   This includes legally reviewed offering memorandums, not paying finder commissions, and any registrations required with the state that you reside when making the investment.

 Summary

If you have been making an income that would qualify you as an accredited investor ($250,000 personally), then it is likely you have accumulated a portfolio and/or a 401K that is worth over a million dollars. You may have heard about “angel investing” but didn’t think you could participate because you simply were not liquid enough and you didn’t know much about how to make that investment because your Financial Advisor or Wealth Manager never talks about private offerings.  In the Podcast I go into some of the regulatory and market reasons for this: Listen Now. Typically only a Registered Investment Adviser who is not paid a commission on the placement of investments will explore how a high net worth investor could uses existing holdings to make investments in private companies.

Karen Rands, Host of the Compassionate Capitalist show, explored these two ways to make investments into private companies when an investor doesn’t have cash on hand but has ample accumulated wealth.

Listen to the replay:  http://www.blogtalkradio.com/karen-rands/2014/04/22/compassionate-capitalist–angel-investing-when-you-dont-have-cash

Sign up for all the news and learning opportunities….be a part of the new generation of sophisticated investors seeking to include private equity into their wealth creation strategy:

National Network of Angel Investors member site:

Join us on Twitter:                        and Facebook

 

 

8 ways to Mitigate Risk as an Angel Investor

Research done 6 years ago determined there were 7 key ways an angel investor could mitigate risk when making a private equity investment in an early stage company.

See the original article: http://myvirtualangelworld.com/2008/08/05/mitigating-risk-for-private-investors/

Additional experience in working with investors since then that have made multiple investments, yet not lost their investment, reveals one more way to reduce the risk in these young private companies. Number 8 method is to ensure the company has a clear strategy for generating revenue sufficient to sustain growth and profitability.. Market Validation, #7, is key because you know at least some customers want to buy the product or service, but only actually becoming profitable can lead to the kind of company that will produce a liquidity event that will provide a return on the investment. The company must understand how the will get their first customers, then expand their sales force or sales strategy to grow their pipeline, while also anticipating what they will need within their operations to support that sales growth.

Listen to the original podcast that has multiple guests explain each area that an investor can mitigate risk:
On ITunes (episode 153) https://itunes.apple.com/us/podcast/karen-rands-compassionate/id302182696?mt=2&ign-mpt=uo%3D4
Or download BeyondPod for Android or IPhone and subscribe to the Compassionate Capitalist show and listen to this episode and any others.

This particular show is longer than the others because of the rich content. The first 7 ways for mitigating risk are:
1.Intellectual Property Protection – patents, copyrights, trademark, trade secrets
2.Management Team/Advisers – experienced management from within or recruited from outside
3.Insurance – key man insurance, errors & omissions, other corporate insurance
4.Strategic Planning – what will they exactly do once they have their funds
5.Sales Validation – do they have the sales team/strategy that can achieve the expected results
6.Terms of Investment – small terms may have big impact on the angel investor down the road
7.Market Validation / Competition – having sold something or having market validation in a pipeline, joint venture, or in improving on the competition go a long way to validating the opportunity

This information is offered as part of an ongoing effort to educate High Net Worth men and women with a desire to become angel investors and are new to angel investing on how to diversify their portfolio to include private equity investments and increase their odds to produce a return on investment.   This is being delivered through the National Network of Angel Investors.   This particular topic will be a new chapter in the soon to be released revised edition of “Inside Secrets to Angel Investing”.   Visit the NNOAI website or the AngelInvesting101.com site to sign up for free excerpts from the Inside Secrets to Angel Investing.

And follow us on Twitter:   http://twitter.com/NNOAI

And on Facebook:   https://www.facebook.com/thenationalangelinvestornetwork

Earning an Annuity as an Angel Investor- Yes, Virginia it can be done

Similar to other investment options, an investment in a private company can produce annuity type income.   When starting out as an angel investor an investor should plan on making multiple investments with diversification of industry and structure as a core principal.  Accredited investors with sufficient liquid capital to make multiple strategic investments over a period of time, will likely diversify their portfolio of private equity stock investments to include multiple types of investment structures.   Similarly to an investor looking to get involved in real estate investments with different targeted outcomes; short term return (flip), revenue producing (rental), and long term (raw land). An angel investor should seek to diversify into multiple types of offerings:  debenture with option to convert (flip); royalty or revenue cycle financing (rental); and traditional equity (raw land).

In this episode of the Compassionate Capitalist Radio Broadcast (REPLAY) http://www.blogtalkradio.com/karen-rands/2014/03/25/earning-an-annuity-as-an-angel-investor  Karen Rands shares her insight into the different types of angel investments and specifically how to identify private alternative investment opportunities that can produce a re-occurring revenue stream.

The conventional wisdom for angel investing is similar to venture capital investing— invest in 10 companies, wait 5-10 years to discover which one or two of the lot produced a big enough return on the investment to make up for the 4 that lost all of the investment and the 2 that broke even and the 2 others that gave you just a teeny return.   It doesn’t have to be that way.   When wealth men and women apply the same discipline they have learned when managing their public stock decisions and their real estate investment choices, and seek to have a long term strategy that calls for diversification of industry and investment type, they increase their odds of a higher rate of return because they have balance and load.

Diversifying by industry and into market areas that an investor already has an interest ensures some level of insulation from the natural economic ebb and flow industries experience.   Diversifying by product / investment type allows for shorter term results off set by long term hold.   For example, an investor just starting out could “loan” money as an investment secured against orders with the option to convert or to have it paid back but with warrants, then they get their money back, but have an option for discounted equity.   After a couple of those types of investments, they begin to accumulate additional liquid capital that could be invested in to an offer for royalty or revenue cycle financing.   This is a type of investment that is made but instead of an equity stake, the investor received a re-occurring revenue stream as a % of revenue until an agreed to multiple on the investment is paid back, usually 4X the investment.  Companies with the potential for long term growth and opportunity to go public are ideal for equity investments where the investor will have their investment capital tied up and illiquid for 5-8 years.   This type of equity investment is the most risky, because a lot can happen in 8 years to cause a company to not succeed, but if they do, then the results can be 10X to even 25X return on investment.    Early investors in Microsoft, eBay, Amazon and many others all experienced this type of return.    Keep in mind though… for every one of those, there are at least 10 that never got that far and never gave a return on investment.   There are some, like the companies that went public with a big splash… Web Van, even Facebook,  that did not hold its value after going public, but the initial angel investors made their money back and them some, probably at least 5X if they sold when it first went public.

You have an opportunity to get more information on this type of diversification by listening to the podcast or buying the Inside Secrets of Angel Investing.    This is the topic discussed in detail in Chapter 5.   You can also sign up for free excerpts from the ebook, Inside Secrets to Angel Investing.

Are you an investor that is tired of the volatility and unpredictability of the stock market? Are you frustrated that you have little influence to affect the management or operation of that public company? Have you realized that the public stock market is actually pretty risky and the overall return on investment isn’t that great?  The Join the New National Network of Angel Investors and be a part of the growing community of wealth men and women that want to master their wealth portfolio and learn how to be Compassionate Capitalists  – make money and contribute to the economy at the same time. 

What Keeps 750,000 Accredited Investors from becoming Angel Investors?

What Keeps 750,000 Accredited Investors from becoming Angel Investors?

Karen Rands, covered this topic on her Compassionate Capitalist Radio Show recently.

In a nut shell….lack of knowledge — The men and women who are earning over $350,000 a year in income, as tracked by Census and the IRS, are likely executives in a large company or run small to medium size businesses.  They didn’t make their money in a venture backed high tech company and likely aren’t part of a company that raised capital to get started, or if they are, they weren’t part of the team that founded that company.   They aren’t being encouraged to invest in private companies by their financial planner.  For the most part they aren’t even aware of “angel investing” as a wealth creation strategy and may not know that stock of private companies are available to purchase before they go public.   They are the ones that try to “get in on” the first issue of public stock for the hot company they are hearing about.  They are sophisticated investors so like the idea of having their money work for them.  That is why they often invest in real estate.  Yet if they knew they could apply the same practice they use to decide if a property is a good investment or a public stock is a good buy to the decision to purchase equity in a private company, and have the opportunity to own a % of multiple entrepreneurial endeavors with strong potential, they would choose to include that as part of their wealth accumulation strategy.

According to the US Census, there are an estimated 1,150,000 households that earn over $350,000 a year. Furthermore, there is an estimated 250,000 active angel investors involved in structured groups and actively considering investment in early stage companies as a means to create wealth in their diversified portfolio. And if we assume there are at least 150,000 of the wealthiest that have too much money to be angel investors…they don’t invest directly into companies, they invest in the funds that fund the companies. That leaves an opportunity for the remaining 750,000 to become angel investors.

Listen to the Podcast for the full report.

Whenever there is a shift in the market, there are key factors that trigger it and contribute to a successful shift.  The 3 A’s of Market Movement:

  1. Awareness
  2. Adoption
  3. Access

Awareness of the potential to invest in a high growth company before it goes public or grows in value to attract an acquirer is growing as “crowd funding” news continues to spread around the internet and in the general press.  With the advent of the Jobs Act of 2012, “crowd funding” became a common term bantered around, often within the wrong context, but none the less a phenomena that people were talking about.  Wealthy men and women who consider themselves “sophisticated investors” with an  above average Financial IQ are curious about this as a new “hot” investment platform.  Yet there exists a cloud of confusion around “crowd funding” because although passed by Congress and signed into law by the President, the sale of securities is regulated by the Securities Exchange Commission (SEC).   As of this writing, the SEC still has not issued their rules for the Title III part of the Jobs Act that specifically addresses  how companies will do equity crowd funding at a national federal level.   Currently 4 states offer specific legal guidance and approval for companies incorporated in their state to raise money from investors in their state via crowdfunding methods- Kansas, Georgia, Michigan, and Wisconsin, with Washington, Alabama and South Carolina considering legilsation.   Companies are permitted through Title II to raise capital from Accredited Investors under the Reg D 506c and Reg A, under specific conditions, and market to them via the same means that companies use in rewards based crowd funding.  Learn more about history and status of crowdfunding.

As this community of sophisticated investors who would easily qualify as “accredited investors” via the certification process by providing copies of their W2 or past tax filings become aware of the opportunity to invest in private companies they must learn to adopt the mentality of an angel investor.  Angel investors think differently than regular investors who are simply wealthy.  Angel investors have to have vision and imagination.   Entrepreneurs seeking angel investment must be able to cast a vision that the potential angel investor believes can be a reality.  They must imagine the potential results that the management team will be able to produce with the product and strategy they are offering that is at the core of their investment opportunity.  If the entrepreneur is successful in conveying that story and it is better than the one the investor just heard or will hear the next day, then they will be the lucky one to get that angel investor’s money.   Traditional investors look at the history of a public stock to anticipate a trend, the market comps on a real estate to predict a trend… all with the intention of buying low to sell high.  None of that really exists with private companies.   That is where an investor has to “think outside of the box” and think about the company beyond just what has been done so far and grow to understand that buy adding private equity investment to their portfolio they have an opportunity to produce a greater return…if they don’t lose the entire investment.   Investment in private companies is by its nature very risky.   It is an illiquid investment and sometimes the return doesn’t come for many years down the road.   So as sophisticated investors adopt private equity investment in early stage companies as a strategy to grow their portfolio, they must also be extremely patient.  They also must take the time to learn about the legal requirements to make this type of investment.

With knowledge that they can own pieces of many companies, and the desire to become an angel investor, all that is left is access to the deals and the due diligence.  Traditional angel investors join groups that help with the screening and due diligence process. Committees are formed to screen deals so only the best get a chance to pitch to the group at large.   Committees are formed to conduct due diligence on the company and report back to the group of investors so they can decide to participate in a pool of funding for that company.   They may have an obligation participate on a committee periodically and to attend the monthly pitch meetings and follow up meetings.  They can spend this time because they typically don’t have a day job.  They are wealthy because they had an exit from a company or an investment that provided them with disposable income to invest.   They “self certify” in traditional angel investments so as to avoid full disclosure on their actual net worth and sources of income.  The 750,000 accredited investors we are talking about here, that are void in the marketplace now, are too busy to participate in those groups and participate on a committee that requires time, even if the group is actually located in the city they live in.  They have access to public stocks through stock portals to do the research and trades whenever they want, 24/7. They have real estate agents find them investment properties.   Their financial planner won’t find them private company investment opportunities because of the rules they have to adhere according to FINRA.  So gaining access to a variety of opportunities to consider that also have full disclosure and due diligence information available is critical as the final trigger in the market shift.

Kugarand Capital Holdings, LLC is launching a secure portal to provide the opportunity and the due diligence necessary for this type of sophisticated accredited investor.   The 22 year old NBAI is being transformed into The National Network of Angel Investors comprised of small regional groups forming virtually around the country based on regional or special interests.  Education is provided on an ongoing basis through articles, white papers, podcasts and videos.  Sophisticated Accredited Investors seeking to understand how to become an Angel Investor…how to adopt the mentality, but also learn the ropes of being an angel investor… applying the knowledge of stock market and real estate investment to private equity investments will purchase the book “Inside Secrets to Angel Investing” as their road map.

Are you an investor that is tired of the volatility and unpredictability of the stock market? Are you frustrated that you have little influence to affect the management or operation of that public company? Have you realized that the public stock market is actually pretty risky and the overall return on investment isn’t that great? Then the time is now to participate in this market shift….  Then learning how to invest in private companies, purchasing shares in a company before it goes public, while the valuation is still low, could be the wealth creation strategy for you.   Tune in to learn how to join the world of compassionate capitalism

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The National Network of Angel Investors

6 Reasons Why Private Equity Investment is the Next “HOT” Asset Class for Sophisticated Investors

During the last few years, we have survived one of the worse economic downturns. The new “normal” by many standards is a 10 year set back. Money is like water, it finds a way to flow and come together to multiply. Leading up to the economic crash of 2000, we saw an increase in angel investing triggered by the increase in venture capital investment. As more companies were going public, we saw an increase in day trading as a means to quick wealth. These were enabled because big money from retirement funds, private equity funds and family funds invested in the venture capital funds and took large positions on companies in their initial public offerings.

When it all imploded and the bubble burst, it took a couple of years but angel investing and venture capital investing came back. The intrinsic value of investing in private companies in their early stage was not in doubt, it was the process – how companies were identified and vetted that was in question. Investor groups became more formalized, with better pre-screening, due diligence committees, and terms negotiation. Similar economic conditions exist now. The difference in then and now is that most of the people participating in the growth of angel groups in the mid 2000s were successful high-tech entrepreneurs investing in similar companies to influence a repeat of their prior success without the full cost of time and capital in starting and growing a company.

As an economist, who has worked with angel investors for over a decade, I have identified 6 reasons why private equity investment will be the next “hot” asset class for high net worth men and women that want to create generational wealth.

  1. Increase in Risk Tolerance: In the last decade, fortunes have been lost in real estate and the stock market. As investors become more sophisticated and become aware of the ability to invest in private companies because of the buzz surrounding “crowd funding”, they are willing to take the risk because the potential for return is greater than with other asset classes.
  2. Quasi Public Offering: Market Makers are going to be looking for new places to put money and the new rules on general solicitation open up opportunities, awareness, and access to private companies. Private companies raising capital under a 506c will be the next favored market place because it’s easier to directly reach investors to create the market for that stock.
  3. Return on Investment: Early stage companies that have received private equity investment from angels have found a ripe market to sell their companies to larger corporations even before they need their B & C round of capital. Early investors are not as diluted and the timing for exit is shorter than for companies trying to grow to the point of being able to go public.
  4. Increased Value: Angel Investors already know the early stage company’s value is at the bottom and will either go up or go out of business, but the investors can impact the company’s value success through their involvement than they can with a public company.
  5. Safety in Numbers: With the advent of strong collaborative investor groups and investor portals designed specifically for investors to be able to identify, investigate and invest in early stage companies the way eTrade provides that access to public companies, individual investors have an opportunity to collaborate with on early stage companies.
  6. Efficient Use of Capital: The cost to launch a company is lowest so the investment dollar goes further. Young entrepreneurs can join incubators that are associated with either universities or as part of an economic development initiative in their area.

Watch this space — angel investment will become one of the best asset classes for sophisticated investors to increase their wealth as the economy continues to rebound and early stage companies continue to have ample access capital to grow profitably and create jobs.

You can get a free report on the 5 Billionaire Secrets and excerpts from the popular “How To” book for investors seeking to learn the ins and outs of investing in the equity of private companies: Inside Secrets to Angel Investing–  Simply visit http://.angelinvesting101.com and optin on that page.
Visit http://NationalNetworkofAngelInvestors.com  to join a community of Compassionate Capitalists and help build a network of sophisticated investor that are like minded in their desire to help entrepreneurs succeed, and increase their wealth by doing so.

How to Create Wealth through Angel Investing

Angels are the financial fuel of the economy. Before Venture Capitalists get involved, before banks will loan a company an unsecured note; Angel Investors provide the capital that fuels the entrepreneurial spirit and helps inventions become products and ideas become reality.  They take the greatest risk, but also have the potential to reap the greatest rewards.   The return on investment for an affluent person who invests in a company at the early stage can be as much as 10 or 20 x.   The original investors in Microsoft, Amazon, Google, and even traditional non-tech businesses like Home Depot all made huge returns.  The logic behind it is quite fundamental….buy low, sell high.  But unlike buying a public stock at say $1 a share and it going to $20 a share are rare.   When an investor buys a private company’s stock at an early stage of their development, the likelihood of that stock increasing to reflect the growth in value from a start up to a revenue producing profitable company is much more likely to go from $1 privately to $20 as a public offering.

I like to refer to Angel Investors as Compassionate Capitalists. “Compassionate” because they have figured out that even though they can lose all their money, by providing investment capital to an entrepreneur with passion and purpose to see his or her company succeed, they are providing a hand up, not a hand out, that will fuel the economy by creating jobs and potentially whole markets by bringing innovation to the market. “Capitalists” because they aren’t donating to a charity, they are investing in a risky venture that banks won’t loan to and venture capitalist won’t even look at, with the intent of creating a big return on their investment. High net worth men and women become angel investors to create great wealth, never with the intent to lose money.

Angels are wealthy individuals who provide seed capital and growth capital to companies in the start up and early stage of their company’s life cycle. Their capital can be offered in exchange for equity in the company or as some specialized form of debt facility. Investing in this stage of company is the most risky, but it can also be the most rewarding. Rewards come not just from the financial returns, but also from experiencing the purest form of capitalism…bringing value to the market by supplying a product or service to satisfy a market demand. There is a definite sense of pride and accomplishment from being able to say you were an early investor in a block buster like Microsoft or Starbucks, and surprisingly, there is little regret from the early stage investors in the near misses like WebVAN and PETS.com because they got their sizable returns when those companies went public. It was the investors that followed the advice of their stock broker or financial planner to invest when those companies went public that saw a decline in the value of their investment because they bought at “retail” hoping that the value would increase over time. Angel investors buy stock when the company is still private, and reap their rewards when the company then sells that stock to another buyer or to the public stock market. They learned early in life that profit is made when buying at wholesale and selling at retail. That is how it works for the wise angel investor.

Investing or buying Private Equity of early stage companies is one of the secrets the wealthy use to create more wealth. As Robert Kiyosaki wrote in his best seller book, Rich Dad’s Retire Young, Retire Rich on page 127:

“the rich invest in shares of a company when the company is still a private company”.

To become a successful angel investor, it is important that individuals learn how to identify and screen opportunities for early stage private equity investing. In the eBook Series “How to Be an Angel Investor”, investors are taught how to take what they know from investing in public stocks and real estate and apply to making investment decisions about private equity investments.  You can subscribe to free excerpts of those books by going to this web page:  How To Be an Angel Investor

A survey of active angel investors revealed a startling and little known fact.   Most angel investors learn how to be angel investors by losing their investments….learn by doing and losing!  Oops won’t do that again. Investors can take classes on real estate investment and stock market investment, but rarely is there a class on angel investment.  Some new investors are fortunate if they have a mentor that will lead the way or if they are near an angel group that they can join to provide an environment to identify, vet, and co-invest with.  Many more potential investors are not located in an area where there is an angel investor group or they don’t want to be tied down to the commitments of a group.   The Center for Venture Research of New Hampshire University found in their survey of angel groups, 66% of the angel investors that could invest, didn’t.   They were called “latent” investors.  Here they are, part of an angel group, with full intentions of making investments into early stage and start up companies, but don’t actually stroke the check.  Why? It doesn’t make any sense until you learn that they hesitate because they are unfamiliar with the process.  Buying a public stock is easy….just call your broker, or go online and point and click.  Buying private stock involves signing paperwork; not really sure what you actually bought; how to measure the growth in value; when do you get to sell; do you get a piece of paper like a stock certificate for your $30,000???? and so on.   Even though broker/dealers are the ones authorized to sell private stock, most don’t because their costs to the companies are prohibitive for a pre-revenue company, and they discourage their wealthy clients from making those types of investments because of the fear of the SEC slapping them with a “selling away” charge and yanking their license.   What is a millionaire to do?

The ebook series described above was written for this very purpose.   Years of research, volumes of information, and scores of books were summarized for the consumption of a millionaire wanting to learn how to be an angel investor.

The “Freudian” perspective on Angel Investing

Becoming an “angel investor” is not for the faint of heart.   It isn’t quite as exciting as jumping out of plane at 40,000 feet or hang gliding off a cliff at 3000 feet, but when it comes to knowingly entering into an investment that by its very nature has the potential to lose every penny of your hard earned cash… that takes guts.   So here is what one needs to understand about the men and women who boldly go where mere real estate and stock market investor don’t dare to go.  Of Freud had been around during the Dot.Com bubble and the latest up/down of angel investment,  he may have applied his theories of the Id, Ego, and SuperEgo in this way.

The  motivation for sophisticated affluent men and women to become angel investors or as some might label them, early stage venture capitalist is driven fundamentally deep within to face the risk in pursuit of a perceived big reward.   The thrill seeker who jumps of a cliff to fly through the air, does so knowing there is risk, but the reward, the thrill, the adrenaline, the sense of accomplishment, the oohs and aahs of their peers that see their success….all triggers the desire to face known risk.   Becoming an Angel Investor can be compared when viewed through the Freudian theory of development.

  1. Investor Id:  What does the Id care about?  ME, ME, ME….so in the realm of money, that translates to greed—What is in it for ME. So these these folks will take the risk because it has the potential biggest return on investment and the only asset class that actually has potential to provide multiples on money within a decade of the investment.   And the bragging rights of being in some hot new thing doesn’t hurt.  Whether on the golf course or over cocktails talking about breakthrough in technology,  “Sure, about a year ago I invested in a little company that does Y” or is in a popular magazine for doing X….”Oh ya, I have some of the equity in that company…. got it for a song as an early investor.”
  2. Investor Ego:  This is where the pragmatic hat goes on and even though the investor wants to make all the money and negotiate all kind of terms to guarantee that, they realize that the CEOs need to be motivated, and there needs to be room for other investors to come on and follow on investors.   So instead of mitigating risk based on onerous terms, they will seek to invest in deals that inherently have some of the risk removed because the company has been validated.   This is where the real RISK vs REWARD trade off come.  “Without a more experienced management team to ensure you can execute, I will require a board seat.”
  3. Investor SUPEREgo:  This is where an investor become a “Compassionate Capitalist”.  Usually, only the most advanced investors reach this stage.   They have made so much money from their own entrepreneurial endeavors and from their past angel investments, that the can “afford” to be generous with their investment into entrepreneurs.   They know that many of their investments will fail and they go ahead because they really want to see that innovation get to market or to give that entrepreneur a chance to succeed because they can see the spark.   They have confidence that some percentage of their investment will hit payload and make up for everything they have lost previously.   They have pursued their professional hobby of investing with zeal by learning by doing and learning from others, so that their Financial IQ is top of the game.

Unfortunately, for those that jump in at the Id stage, they sometimes never get to the other stages of advancement because they make a poor investment, lose a lot of money, and decide to stick with the much more predictable stock market and real estate.   This is why education for investors at that very early stage of their exploring angel investing is so important.

Angel investing is the only type of asset class that the investor can’t get advice from their financial planner or wealth manager regarding.   SEC will fine that trusted adviser and potentially even pull their license if they find out they advised them on a private equity investment…..or so that adviser thinks.   It really only happens if they take a commission on the transaction and does not run it through their broker dealer.   Nonetheless, most often the case is that the investor can’t sign up for weekend class, has to drudge through book written like college text books or learn by doing which early on means learn by losing.

Fortunately, as the angel investor industry has gotten more and more successful and sophisticated, the industry has taken it upon themselves to begin offering education for investors.  We have seen large conferences being offered in Boston and San Francisco.  With the advent of Georgia passing their own Angel Investor Tax Credit to encourage sophisticated investors to put money into early stage private companies, there have been an uptick in education being offered in Atlanta. Other states offer tax credits and subsequently education.

We have long been a source for investor education through our email newsletter and our “Inside Secrets to Angel Investing”. Excerpts are available when you optin. Information is available about the book and the limited time offer with 6 bonuses at http://angelinvesting101.com

Protect Your Wealth through OffShore Accounts & Trusts.

America is fertile ground for entrepreneurs to take innovative ideas from concept to reality.  Investors seek these opportunities to increase their wealth by investing in these innovative companies before they go public or become big profitable companies that get bought by equity funds or other companies.  Most of these affluent individuals do not realize that they can become subject to the same risks and liabilities as the founders of the company.  Even Board of Directors are sometimes the target of frivolous, greed based law suits.

America is also the fertile ground for most lawsuits against corporations and their largest share holders, founders, executive team and board of directors.   Insurance is not enough to protect that company and insulate the investors and directors.  The mere success of the company can create a dangerous environment of becoming a target for lawsuits. America is a litigious society.  Disgruntled inexperienced share holders, former employees, and dissatisfied customers have potential to seek compensation through a lawsuit that could impact the value of the company, your personal wealth and the intellectual property you think is beyond reach.  Traditional measures of corporate liability, errors & emissions, key man insurance – are simply not enough if you haven’t taken specific measures to protect those assets.

Listen to this podcast to hear from the premier expert in this field for protecting your wealth and your assets from frivolous lawsuits.  Kevin Day, founder of Day & Associates, one of the top three law firms in estate planning focused on Asset Protection law and complex high net-worth issues.  Kevin Day is a well respected speaker at business tax planning, estate planning & investment planning conferences throughout the United States and Canada.

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