While it is certainly gaining momentum, angel investing will not suit everyone. If it is a market you are considering entering, read these top tips to boost your chances of success.
1. Get into it for the fun, not the profitEntrepreneur Peter Cowley was the UK Business Angels Association (UKBAA) 2014 Angel Investor of the Year. He warns that those considering becoming angel investors should not get into it if they are simply looking for a quick profit. He said:“What attracts me to angel investing is not necessarily the return; it’s the fun of meeting the people, seeing the technology, the markets and learning from the process.”
2. Know the market you are enteringMichael Blakey, the UKBAA’s Angel Investor of the Year for 2015, points out that not every angel has to have knowledge that is directly useful to the company. “There are two ways of angel investing,” he says. “One is to be actively supportive and the other is to be a silent investor. But if you want to be a silent investor, make sure you are teaming up with someone who has a lot of experience.”
3. Be patient and diversify your portfolioThe UKBAA advises would-be angels not to invest only in one business and not to do it alone. It also recommends that angel investment should be part of a diversified portfolio, adding that it is smart capital but also patient capital. “It could be eight years before you see any return. And at least 50% of your investments may not return your original investment. But out of, say, a portfolio of at least ten deals, you should expect at least one or two to offer a substantial return, potentially having been snapped up by a corporate, or by a private equity fund,” Jenny Tooth, Chief Executive of UKBAA, cautions.
4. Ensure that due diligence is completed at every stageMany companies fail, and there are many reasons why. Maybe the product just didn’t work, or it took longer than expected to gain traction, and the business couldn’t sustain its funding. There might have been a competitor or two that they, and you, didn’t know about.
Cowley says that asking enough questions when investing in a later stage business, such as one that is past its first, second or third round of funding, is vital. “Not doing enough due diligence can be pretty fatal. Three of the four failures I’ve had have been exactly that. You’re going into a business thinking it is priced correctly, which it may be, but the history isn’t easy to get at or has not been released.”
5. Care about your investments, but be prepared to walk awayBlakey’s worst experience was in a business he doesn’t want to identify but which typified some of the mistakes that angels can make. “I fell in love with the opportunity and ignored warnings from people I trust, as I’d become too emotionally attached to it,” he says. “I also had doubts about the management team, which turned out to be justified.”
He also admits that even after realising early on that this company was going nowhere, he spent another year hoping to get back some of the amount he had invested. “When you no longer believe in an opportunity, just walk away,” he advises, “and then focus on the companies that are doing well.”
The original version of this article was published in the December 2015 print edition of the Review.
Correction: In the original article, a paragraph is unclear about which resources are available from the UKBAA.
The incorrect paragraph says: "It [angel investing] is an experience that the UKBAA is keen to promote, and it emphasises that its resources are at the disposal of anyone who may be considering angelhood."
The correct paragraph should say: "It is an experience that the UKBAA is keen to promote, and encourages those interested in understanding more about angel investing to take advantage of the range of information and resources available on the UKBAA website, or to participate in the new e-learning courses coming on stream in 2016."
The CISI apologises for the error.