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. 

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.

Mitigating Risk for Private Investors

With the turmoil of the stock market and the advent of large blue chip companies failing and event real estate faltering….risk vs reward takes on a whole new meaning.   Private Equity Investing in early stage companies has long been considered the most risky of asset classes to put money into.   However, it has proven historically, even in the market collapse of the dot-com era, to be the investment class that produces the greatest return on investment.   Angel investors historically get better returns than even VCs or the big Private Equity Funds you hear so much about.   Why is that?

Angel Investors tend to get better returns because they invest when the company has the lowest valuation.   The stock they buy may be less then $1 a share, and yes although you can purchase stocks on OTC BB or even the regular exchanges at less than $1 a share, that is usually becuase of some decline in value.   Early stage companies that are currently valued at less than $1 a share have all the promise of massive increase in valuation.   If they are starting out at 50 cents a share, and then get purchased at a modest valuation years from now at $5 a share, that is 1000% gain, or even if they do what most regular public companies go public at greater than $10 a share…presto big return.   Enough to make up for the 3 or 4 that went belly up….that is the risk part of the reward.

So how can you mitigate risk when making an investment in private companies?   There are 4 key areas:

  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

Listen to Karen’s Podcast on  Mitigating Risk for Investors Now!

To get the full list of Free or Near Free resources, go to www.launchfn.com and click on the Information section.

Get your 5 Free Investor Tips Now! Go to www.getinvestormoney.com

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

How do you Know an Early Stage deal is a Good Investment?

An investor called me yesterday asking if I knew of any sources, or guides she could use to analyse a deal to see if it was a good investment.   It is challenging to make definitive decisions when investing in private companies because the information you would use to make an investment decision about  real estate or a public company are generally not available to the investor.   Yes it is true, you may not have a P/E Ratio to consider, or a robust balance sheet and historical financials, and much of their story is an attempt to predict the future.   Heck, they can’t predict the future in the stock market or the real estate market….otherwise no-one would lose money in those areas….so who thinks they can really predict the future of a private company that is early stage?

In reality, there are many things you can scrutinize with regards to a private company to determine if they are a worthwhile investment.   Keep in mind, the whole idea of being an accredited investor investing in private companies is that there is a strong likelihood you could lose everything.   Money invested in a private company should be money that is not needed, not needed to pay for your kid’s college education or anything else, but when it produces a return of 2x to 10x or more….you know exactly how you will spend it celebrating!

So what do you look for to mitigate risk when investing in the riskiest of investments?   The actual fundamental formula has been proven time and time again and is quite logical actually.   An Class A Management team with a B Grade product/offering is more likely to succeed than a Class B Management team with an A Grade product/offering.   It is kind of like one of those 80/20 rules….  80% of your business comes from 20% of your clients.   I don’t know why these things are almost always the case, they just are.    So the obvious next question is; How do you know you have a Class A Management team?   And that is simple….either they have built a company in the past that produced a return on investment to the founders and investors and/or they are currently executing on their business plan successfully.   Current and past performance are the greatest indicators of likely future success.    A blog entry at AlarmClock.com said it this way: “We have a template response: 1) Have made money for investors before 2) Have lots of users or 3) Have killer tech.”   (Full entry can be found in link below.)   Both 1&2 have to do with past performance and current performance.   #3 is the other thing you look for.   Does the technology or offering solve a fundamental need or gap in the market and therefore is there little to no current competition?  To build upon that, is the technology/offering protected so that it can’t be stolen or knocked off….protected by patents, copyrights or really well managed trade secrets?  And I’ll add a 4th point to look for….does the go to market strategy make sense and is well thought out?  Do they know how they are going to sell it, to whom, and for what price that makes a profit?    Finally, the decision to invest, after all the above bars are met, comes down to terms.   Sometimes an investor must accept the proposed terms the company puts forth in their Private Placement Memorandum.  Sometimes they can pool their funds with other investors and create leverage to negotiate different terms.     

So what is an angel investor to do?   The number one reason an angel investor that could invest doesn’t invest is because they are uncomfortable with the process….the due diligence process.  It takes a lot of time to meet with a company, review their due diligence, and assess these different strengths and weaknesses.   In our angel investor group, The Network of Business Angels & Investors (www.nbai.net) they manage this problem by having a firm do the initial screening to determine that the fundamentals are in place and if it is a management issue, then it is identified up front.  We use the Launch Funding Network’s screening process (www.launchfn.com) and have angel investor forums about every 6 weeks where companies that have been screened and scrubbed get the opportunity to tell their story.    This saves time for the investor because they get a volume of deals at once and they know that the “sniff” test has been passed.  

 Finding good deals to invest is a matter of having a system that can handle volume and having a community that you can co-invest with and share the due diligence work with.   Most Posting Sites don’t offer any of this.  They just post without any screening or validation.  If you don’t have a community to participate with,  you need to hire a small team to do it for you—lawyers, accountants, business advisors etc.    We like our “country club for Investors” approach.   Have fun and make money too!

http://www.thealarmclock.com/mt/archives/2008/02/fundability_lau.html#Permalink

 

To get the full list of Free or Near Free resources, go to www.launchfn.com and click on the Information section.

Get your 5 Free Investor Tips Now! Go to www.getinvestormoney.com

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

What is Angel Investing?

Angel Investing is the industry term used to describe when a private individual invests money into a start up or early stage company before that company is public.   High net-worth men and women provide needed capital to entrepreneurs that cannot go to a bank to get because their company is still unproven.   Just about every company that ever went public, had at one point in time attracted the investment growth capital from individual investors.   And even in the case of flame out companies like WebVan, the angel investors in that deal made their money because they bought their shares at a lower valuation, say $1.00 a share, so that when the company went public, at say $25 a share, that investor made 25X their investment.   A $100,000 investment in a company such in that example, became $2,500,000.   That is how the rich get richer.   But it is never a sure thing so an angel investor must also be prepared to lose the full $100,000 if the company fails to execute on their strategy and go out of business before a liquidity event happens.   This is partly why the SEC regulates private equity investing in non-public companies and tries to ensure that only accredited investors make that type of investment.   Accredited investors have enough income or accumulated wealth that the government assumes they should know if an investment is good or not.