Top 5 Reasons Private Equity Investing will be the Next HOT Investment Trend

I’m an economist by training and a capitalist by living.   I have been analyzing and assessing market trends for decades and really became a student of it when I discovered my foray into venture capital and early stage investment markets in 2001 was at the downhill slide, not the uptick for that investment trend.  But I rode that wave and have been actively (and successfully) building an angel investor community in Atlanta and helping early stage company get the capital and resources they need to grow.  

This crazy economic roller coaster we are on now only reinforces what I learned in 2002 when I analyzed why the angel investment and venture capital market got so crazy to create the dot.com explosion and ultimate implosion.    Money seeks a way to multiply itself.   Think about every big “trend” where great wealth was created by the market makers and the early adopters, only to have it implode and cost the late entries and followers a lot of money.   S&L bail out, Junk Bonds, dot.com, to the current hedge fund frenzy and the mortgage collapse.    So why do I think that Private Equity Investing will be the Next Hot Thing?  I have 5 reasons:

1.  Sophisticated investors that haven’t yet participated in angel investing have realized that ALL investment classes are risky.  They think:  “With the collapse of the stock market and the real estate market, might as well invest in something I know is risky but I have potential to get 4-8X more ROI!”

2.  Market Makers are going to be looking for new places to put money and the OTC BB market with the new controls recently implemented will be the next favored market place because it easier to directly reach investors to create the market for that stock.

3.  Early stage companies that have received private equity investment from angels will be looking for new ways to exit and the OTC BB public offering is not as expensive as the big exchanges, but still gives access to fund managers for large PIPE investment for growth capital and acquisition isn’t as readily available as it was the past 3-4 years.

4.  Angel Investors already know the early stage company’s value is at the bottom and will only go up or go out of business, but they can more effectively impact the company’s value going up than they can with a public company.

5.  With the advent of strong investor groups forming 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 can have a community to collaborate with on early stage companies.   Visit www.NationalNetworkofAngelInvestors.com (NNOAI) to help build an investor community the way you dream it should be. You can get a free report on the 5 Billionaire Secrets and excerpts from the popular how to book for angels: “Inside Secrets to Angel Investing” when you optin on the NNOAI site.

So watch this space because angel investment will return as one of the best asset classes for sophisticated investors to increase their wealth while the economy enjoys a rebound by early stage companies getting capital to grow and create jobs.

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

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

How Angel Investors can Reduce their Taxes with Tax Credits

Slowly but surely, our Federal and State Governments are recognizing that most new job creation comes from small to medium size companies.  As entrepreneurs launch their businesses, get funding to bring innovation to the market and grow into bigger companies, jobs are created.   Furthermore, they have realized that the primary source of capital to start and grow those businesses are private investors…not the local bank.  Therefore, to provide an incentive to the very wealthy to “give back” to their local economy by investing in local businesses, they provide a tax incentive. By putting their wealth back to work in providing capital to early stage companies, the investor receives tangible benefit in the form of a tax credit against earned income, but they also receive intangible benefits from knowing they have contributed to the creation of jobs and the delivery of innovative goods and services to the market place….ie Compassionate Capitalism.

The Compassionate Capitalist Broadcast covering this topic can be replayed by clicking this link:

http://www.blogtalkradio.com/karen-rands/2014/04/01/compassionate-capitalist-saving-taxes-as-an-angel-investor

This podcast reviewed the various options that investors have to reduce their tax basis by investing in companies that have not yet gone public.   Investing in companies with tax credits associated with them offers two wins…reduced paid in taxes during the term investment tax credit, and return on investment at the point of sale of the equity to a public market or another company.  Twenty-one (21) states now offer tax credits for angel investment.  The Angel Capital Association maintains a list with links for each state to learn what is available in that state.  http://www.angelcapitalassociation.org/public-policy/existing-state-policy/ .

The movie and gaming industry is also a big contributor to local economies.   States have implemented multiple programs to attract companies to produce movies and develop gaming software.  Forty-Four (44) states offer “production incentives” and twenty-eight (28) states offer tax credit incentives to investors in those endeavors.  http://en.wikipedia.org/wiki/Movie_production_incentives_in_the_United_States

For the most part, tax credits are applied against earned income.   If the investor doesn’t earn a “w2” income, the can still gain benefit by selling the credits.  A number of financial firms and legal firms exist to advise investors with tax credits and broker those credits for sale.   This is just one firm that offers good information about selling of tax credits. http://www.taxcreditsllc.com/

It is important to understand the options that are available to you to reduce your tax basis while diversifying your investment portfolio.   As you seek to increase your wealth, it is important to also protect that growth with a reduction in taxes whenever possible.  In most cases the states require paperwork to be filled out in advance by the company to eligible for tax credits.   Some industries may be excluded.   Therefore it is important to become familiar with the programs available in your state and as you look for companies to invest in, take the potential for tax credits into consideration when calculating the Internal Rate of Return (IRR).

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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 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. Join the National Network of Angel Investors and sign up for the educational newsletter and free excerpts from the “Inside Secrets to Angel Investing”. http://NationalNetworkofAngelInvestors.com

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.

Why is Angel Investing such a Mystery to Wealthy People?

Interestingly enough, if you were to ask the average millionaire that you encountered on the street (not that any millionaires are actually average) their thoughts on entrepreneurship, capitalism, and creating wealth; you would likely get comments such as the following:

“Entrepreneurs are the backbone of our society. They create jobs and bring innovation to the market.”

“It is only in creating wealth that anything gets done or paid for.”

“I’d rather give my money to an entrepreneur with half a brain and the gumption to go out and do something with it, than some government empty suit that is just going to give it away. ”

“The people who solve problems make the biggest bucks.”

“Buy low and sell high!”

“The free market – capitalism – gives you personal freedom – to choose your future destiny.”

“I seek to invest my money where I can get a return on investment…the greatest reward relative to the risk.”

So with thoughts and feelings like this, what keeps millionaires with the capital on hand to make alternative investments and invest in early stage private equity opportunities?  It is estimated that 10% of the American population has the means to qualify as an accredited investor, that translates to millions of potential investors, yet only a few hundred thousand participate in angel investor type deals.

Our investigative team has determined that the very regulations intended to keep fraud out of the process and protect high net worth individuals is actually creating a situation where misinformation abounds.   Further, greed and fear actually limit the free market access to information about investment opportunities into private companies these potential investors should have to be able to become “angel investors”.

The Securities and Exchange Commission (SEC) regulates the sale of securities.   What this means is that for entrepreneurs to be compliant in their sales of equity in their company, they must adhere to rules regarding selling those securities as a non-public company.

1. General rule of thumb is that they sell to only accredited investors, with a few exceptions.

2. They must provide documents that clearly state the risk, typically in a Private Placement Memorandum

3. They cannot do a public solicitation through an online posting, email blast, advertisement or anything that will offer the security to the public and therefore they must have pre-knowledge of the investor, or if they work through a licensed broker the broker can sell their security on their behalf.

4.  If they are to pay a commission for the sale of that security, they can only do that with a licensed broker, with few exceptions.

This leads into the Broker side of the equation which is regulated by FINRA.  FINRA, the Financial Industry Regulatory Authority, is the largest independent securities regulator in the US whose chief role is to protect investors by maintaining the fairness of the US capital market.  They regulate the brokers that are authorized to sell and take a commission on private placement opportunities.  Typically brokers/dealers charge large upfront fees and large back-end fees for the sale, and assuming the liability, of selling that security.  They have a due diligence fee, retainer, commission and stock options. To justify those fees, they typically want to work with companies that are raising $5M or more and have revenues to manage to the upfront fee, or have cash on hand from their friends and family round of financing.

Broker/Dealers (BD) often have affiliate brokers, financial planners etc, that hang their license with them.   The brokers, according to the FINRA guidelines, create fear with these affiliate brokers if they are caught “Selling Away”.   So if an affiliate broker sells anything to their clients, the people whose money they are managing, that is not offered and approved by the managing BD, then it is considered selling away from the brokerage.

What Does Selling Away Mean?
When a broker solicits you to purchase securities not held or offered by the brokerage firm. As a general rule, such activities are a violation of securities regulations.
Investopedia Says
Investopedia explains Selling Away
Typically, when a broker is “selling away,” the investments are in the form of private placements or other non-public investments.

On the surface this is all good because the investor only gets products, securities, investment vehicles that have been fully vetted by the brokerage house.   They sleep well at night believing that they have placed their money in solid investment vehicles, whether private or public offerings, they really don’t focus on the difference.

As with any private equity transaction, this does not guarantee that they will not lose money in that investment.  We’ve seen that all over the place even in reputable firms like Stanford or in public stocks like Enron.

But in reality, how this plays out is that the Broker will only promote private offerings that they are being paid to promote.   And investors that want to participate in angel investing, want to “own a piece of a company” don’t get the benefit of having their financial counsel to help them  in evaluating the deal, they don’t get quality deal flow from other sources, and they don’t gain insight into how to make wise investment decisions in that area and manage to the tax implications on the return on investment.

Not all high net worth individuals think of investing in private companies as “angel investing”.  If they are readers of Robert Kiyosaki’s books (Rich Dad, Poor Dad or Cashflow Quadrant) then they likely are working on their financial IQ and working toward being Business Owners and Investors so that their money works for them rather than working for their money.   Angel investing in effect is the entire scope of the right side quadrant….business ownership through investing in private businesses.  Yes you have the greatest likelihood to lose all the money invested in an early stage private company, but you also have the potential for greatest return on investment.   Private equity investing at the early stage produces greater returns than real estate or stocks or any other asset class.

Angel Investing has the potential to create more wealth than any other asset class…at multiple levels.  It can create wealth for the investor that directly invests.   It creates wealth for the entrepreneur that is bringing the product to market and building a successful company.  It creates wealth for the newly hired employees in their earned income.   It creates wealth for all the businesses along the supply chain that service the company, build the products, and so on.

On the other hand, most real estate investment only creates wealth for the seller and those that assisted in the sale and the investor who gets a return from rental income or the upside when it is sold the next time.  Public stock investment doesn’t create wealth for anyone except for the person who is able to sell the stock for more than they paid for it.  There is a commission paid to the broker for handling the transaction.  The money used to buy public stocks doesn’t go into the company’s coffers to invest in R&D or hire new people, it goes to the seller of the stock.

So for those millionaires that “get it”….there isn’t a lot of guidance on how to determine if an early stage private equity opportunity is a good investment nor how to decipher the terms of the investment and if the return on investment will come in the best format for the tax implications and so on for that investor’s overall investment strategy.   The tax implications from a convertible note that has accumulated interest may be different from an investment that shared in the revenue (and losses) of a company; the investment made as a straight purchase of equity that is held for 18 months vs one that is held for 5 years.  And what would the impact be if you purchased the equity through your self directed 401K or as an investment made through a ROTH IRA.

Entrepreneurs that think they are doing the right thing, creating a PPM that even allows for a broker commission and only selling securities to accredited investment has NO idea that a whole source of potential investors are not available to them, actually blocked from them getting access to them.   It is crazy to think they would go to one broker to get access to their investors, pay the fees, then go to another one, pay their fees, and so on.   They typically will work with one broker for a while and then forge out on their own trying to find the individual investors.   If they go the broker route, they typically can’t go back and work with angel groups because the structure of the stock offering is set in stone.   The greed of the brokers won’t let the entrepreneur just pay the broker a commission or to have the affiliated broker take it to one or two of their high net worth clients that have expressed an interest private placement opportunities.   And because of the fear that the affiliate broker has in losing their license if they are accused of “selling away”, they won’t even tell the client about the investment opportunity and NOT take a commission.   When the licensed financial adviser knows the client wants to make real estate investments or buy a franchise, they will refer them to a source for those deals and help them to understand the implications on their financial diversification and asset allocation, and any tax and estate implications.  They don’t collect a commission, they don’t think of this as selling away, they think of it as providing full service to their client based on the client’s interest in different investment options.

So what is the solution?

For investors, that want to be involved in angel investing and they don’t have the benefit counsel from their investment adviser they should do the following:

  1. Buy the series Learn to Be an Angel Investor…it is concise look at the history, process and structure for angel investing taken from 5 years of working with successful investors and their secrets to success and countless industry reference materials. 5 books, or one compiled “Secrets….”
  2. As part of the Compassionate Capitalist Radio Show where Karen Rands revealed the insights gained recently on why so many wealthy people don’t know about or participate in angel investing. Podcast file is include in this posting….

  3. Form a team of advisers that will help you and protect you…this includes a lawyer accountant and financial planner/wealth manager.  They should all have made angel investments in the past or at least counseled others in that arena, either entrepreneurs or investors in early stage capital.
  4. Attend a seminar that can teach you how to be an angel investor or be a better one if you have not achieved the results you hoped for in your previous investments. 

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.

Listen to internet radio with Karen Rands on Blog Talk Radio

How do Angel Investors Find Deals?

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.

Introduction Phase

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.

IntermediaryIf 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.

Learn more about that specific topic with this informative podcast:

Next Steps:

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:

How to Be an Angel Investor

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