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
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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
Karen Rands talks with two successful entrepreneurs that about how they successfully raised their angel investor rounds and their strategy and success in raising their second round of financing.
First half hour will show case Michael Valverde of Chain Reaction eCommerce (www.creloaded.com) an open source development platform for ecommerce. The second half hour will show case Bill Doyle of Vystar (www.vytex.com) who has successfully developed a new process to make latex non-allergenic.
Both of these companies received strategic investment from the NBAI community and direct value from the expertise that LAUNCHfn provided. They have gone onto pass major milestones and are well on their way to their next phase as they grow rapidly.
SPEC Talk Radio – Entrepreneurs tell how they raised their investment capital!
Listen, Learn, Enjoy and Share with a Business Associate!