Angel Investing: Startup Companies

What Angel Investors need to remember before investing in start-ups.

By Gain Investor Staff

Every investor wants to find the next big hit, such as Facebook, prior to it making a buzz on the market. Many investors will also say that investing in start-ups is much like gambling or buying a lottery ticket; you take the chance that you will hit the jackpot. In today’s fully connected world, angel investors need to remember the three fundamental, yet simple, rules to increase their chance of being successful: self-control, process, and diversification. While other rules do apply, these have proven to work over time.

Investors need to practice self-control. While it is easy to get caught up in hot deals and the minimum investment they require, it is also quite easy to quickly become over-allocated. You do not have to become an accredited investor to invest and, with that being said, you should become fully aware of what you are risking or how much you can risk. Remember, most startups fail, for various reasons. Don’t overdo it or you will find yourself in financial turmoil and looking for a private investor for a sinking business deal. Calculate your disposable income first, then invest wisely.

Another problem is that newbies to the field of angel investing tend to follow the crowd; a dangerous move for financial health. The investment process can’t be omitted. Investors should educate themselves in sizing up the market, the product, as well as the team. If you can’t do it yourself, find someone who can perform the due diligence for you. Look for a well-defined exit strategy, opportunities for acquisitions or even initial public offerings. Dear Angel Investor, you have no way of getting back your investment if the company fails, thus, please do your due diligence!

While it is tempting to put all of your finances into what you believe to be the next big hit, remember to diversify your investments. Those investors that have the most experience will admit that investing is much like finding the needle in the haystack. Only a handful of investments will prove to be successful. Ideally, you should consider investing up to 10% of your portfolio in one company. Why? Because you want to spread out the risk evenly. While this thought may be daunting, the key to success is splitting up your finances into many firms and to reserve some capital for those start-ups that show they are winners.  One great option is to invest in women-led startups where the success of the business has been shown to be a bit more stable. How much could you profit? A successful portfolio will give you 20% to 30% as a rate of return. If you are getting much less, it is time to take a look more closely.

At this point, maybe you are asking yourself what the point of investing in startups is anyways. Why investing in startup companies, plagued by high failure rates and severe risks of losing your investment, is even worth it. Well, read our articles Why Invest in a Startup? and Investing in Startup Companies Led by Women. That should clear up some of your worries. When you are ready, take a look at our ads and go invest, Angel investors!