How to become a business angel in 8 steps
Business angels are entrepreneurs who contribute their capital in early-stage startup companies in return for an equity stake. You may consider becoming one yourself, no matter how experienced in business and investing you might be.
Here are 8 rules of a successful angel investor:
- Take advantage of your advantages
- Invest in a market you feel confident about or which you had covered with a network of contacts. Startups expect not only financing alone, but also access to business networking, which can make or break a successful project.
- Clearly communicate what you want to invest in. This way you will not waste time on projects you do not understand or that you cannot help.
- Decide on the money and set your timeframe
- Think how much you wish to lay out. Business angels from the US and Western Europe normally invest from $10 to 50 thousand (or similar amounts in euro) in a single project. Commitments of more than $100 thousand also happen, yet they are hardly seen in Poland.
- Investing in startups is always a long-term venture. The investment horizon should be set three to five years ahead. However, there are cases of gaining ROI sooner than that.
- Monitor the dealflow
- Your contact network should provide you with offers of interesting projects. The more projects you see, the easier it will be for you to make that key investment decision.
- Be where the startups are! Come to O4 in Gdańsk, visit technological parks, check out business incubators, take part in startup demo days.
- Build your own project database. You never know when it can come in handy. You may like Bplanner, where every team can share their projects, including teasers, business models and financial projections, etc.
- Answer yourself the following question: why should projects come to me and what can I offer them that the competition can’t?
- Demand an investment teaser and dip into investment documents
- Investment teaser is a standard document that describes the idea, the team which stands behind it, the market, the current development phase and the definition of investment needs. An example investment template teaser can be found on our website. You can also use BPlanner to receive teasers.
- Get familiar with standard regulations in investment agreements and prepare templates.
- Set evaluation criteria
- They will help you verify projects that you will later accept as a potential investment opportunity. Is there a project team? Do they have an entry prototype or a proper market verification? Do they show appropriate growth dynamics?
- It is important for you to be able to instantly assess whether you want to spend more time on a detailed analysis.
- Find a coinvestor
- It is easier to minimize risk if working in a group of investors. Match with the right partner. Venture capital funds such as Black Pearls VC are open and eager to coinvest with private financiers.
- You can also consider joining a network of business angels.
- Create a diverse portfolio
- To minimize your investment risk, it is essential that you invest in more than just one entity. You should note that only one in every ten projects or so will give you the ROI above average, while two or three will bring you small return or merely break even.
- Be aware that a significant majority of investments involves high risk of loss. This is why it is so important to diversify your portfolio. Do not invest only in projects fraught with high risk.
- Manage your portfolio: think about future financing and exit options
- Your money will not last long. So think how to help your project team in obtaining another investment round or financing from a different source.
- Consider the optimum model of exiting an investment in order to achieve your ROI.
- Regularly monitor the activity of your companies. Create a strategy for crisis situations. Prepare for financial audit.
Photo: Flickr.com JeFFA (CC)