An Angel Investor? Five Things That (May) Help You Become One

03/03/2020

What does one actually have to do to become an angel investor? What are the necessary prerequisites? As you probably know, there is no school or university whose graduates become successful angel investors. Of course, you need to have enough money - but it is actually not that much about the money itself. So, what is it all about? I tried to summarize five basic things that a potential investor must have in order to help other people start a business.

1. Education and experience

As I mentioned in my previous blog, angel investing is closely related to sharing business experience, an experience which cannot be gained at any school. From this point of view, it does not really matter whether the business angel graduated from a technical school or from Harvard. What is more important is how experienced the person is and if she understands how businesses work and how to build one. And also, whether the person is willing to pass on some of the knowledge. Most angel investors have successfully built and run a company; some may have built even several of them. They have first-hand experience what it is like to start a business with limited resources and what problems founders typically face. Other investors may have been in top management positions long enough to understand what does it take to build and scale business. They understand financial management and also the fact that in business, things may go up as well as down. Therefore, you can't say that an angel investor must come from a specific sector. There are angel investors - lawyers (who have built their office), doctors (who have built their practice), engineers, IT professionals, salespeople and others. Despite coming from different sectors, they have one common thing - their acquired knowledge and experience, and their willingness to pass it on to others.

2. Money

Angel investor, logically, needs to have enough money. How much exactly? Hard to say. The rule of thumb is that one should not invest more than about 10% of free capital in risky investments (which startups, clearly, are). If one wants to help startup financially, a few hundred dollars would certainly not be enough. If one really wants to help move the company forward, the total investment amount must be in the order of tens of thousands, sometimes even hundreds of thousands dollars. Of course, it is common for individual angel investors to syndicate, each contributing smaller amount of money; nevertheless, it is still typically at least tens of thousands dollars per each. At the same time, business angel must be aware that she could lose some or even all the invested money. With startups, this happens quite often; the percentage of really successful startups is very small. Therefore, such potential financial loss must not "hurt" the investor too much. Also, investment in a company is not liquid. If, after three years, the investor realizes that she needs to pay off her mortgage, buy a new car or pay for her child`s university studies, she has to get the money somewhere else.

Last but not least, unlike with investment funds, the money that business angels invest are their own. There is a lot of effort and years of hard work behind them. It's their sole responsibility and right to put their money into projects that they choose and want.

3. Character

In business, you meet different types of people, people of different personalities. It is hard to say what qualities are the best for success. However, it is clear that successful entrepreneurs or managers have the right mix - simply because it has led them to success. For angel investing, it is similar. Still, I think that there are a few ingredients that should be part of this imaginary ideal cocktail. First of all, investor must be reliable. She must not be a crook who only makes promises but does not keep them. Also, she should have patience, especially in relation to her investment. Building a company is a long run, and despite all the efforts, some things cannot be rushed. At the same time, the investor must be willing to bear losses when things do not go well (and they do not go well quite often). She must be able to stay on top of things; yet a well-directed choleric may sometimes energize the team as well. Good angel investor does not only pour money into a company and stands aside. Business angel should advise and act as a partner but at the same time she must let the team do their work and trust their abilities.

4. Motivation

What is the right motivation for an angel investor? Since it is financial investment, one of the main criteria is always the return on investment. At the same time, however, it is important to realize that if you are looking for certainty, even with lower ROI, there are investments that are much less risky. Ideally, business angel does not just want to make money. She wants to help develop another business, wants to participate when something new grows, and maybe even help change the world. Business angels often invest in the sectors that they understand best, because they simply enjoy staying in the loop and keeping up with the latest trends. Alternatively, they want to help the region they come from, to give back. They may invest in technology that helps local environment or facilitates elderly care. If the investment is meaningful, potential good return on investment feels even better.

5. Reasonable expectations

Anyone who wants to embark on angel investing should first assess what they actually expect from it. That would save them from future disgust or frustration from an unsuccessful project. Business angel cannot automatically count on her investment to be successful. She should hope for success and do everything to make it happen but still must keep in mind the possibility that things may not go as planned, and the company might go bust. Sometimes, the initial investment is not enough and additional sources will be needed to keep the company alive. Also, the money already invested cannot be taken out whenever the investor wants. If everything goes according to plan, the most reasonable "waiting period" is 3-5 years. However, everything does not always go according to the original plan. Sometimes the project turns out to be non-functional and even another investment may not be enough to save it. In that case, it is necessary to accept the obvious and cut ourselves off from it as quickly as possible. Even an angel can't be spreading its wings forever.