Governments around the world agree that angel investment is an important factor in boosting economies, and many have incentivised this kind of investment. In 2017, G20 leaders announced a focus on angel investment as a necessary measure to stabilise economies, pointing out that there is still a shortage of investors. Baybars Altuntas, an experienced investor and chairman of World Business Angel Investment Forum, spoke to World Finance about his six key principles of angel investment.
1. Understand what and who you are investing in
It is common for angel investors to ‘choose the jockey, not the horse’ when deciding who and what they will invest in. There is much more to this process than a quick binary choice of yes or no, and there are several approaches to considering teams that have been tried and tested in real-life business situations by experienced investors. Investors should consider the proposal from different angles: how much importance does the entrepreneur place on the investor’s background and character? How much due diligence should go into evaluating the start-up’s team? Should third-party collaboration be sought, and how much?
2. Understand the difference between start-ups and scale-ups
Statistics from the OECD reveal that a mere 1.2 percent of start-up businesses manage to attain angel investment, and that only one in 10 scale-up projects that gain investment actually make a successful business out of it. Therefore, what can prospective investors take away from these facts to apply in their own careers? Would it be wiser to deal only with start-ups that achieve lower success rates, by investing small amounts, or to take the risk of putting up more money for scale-ups which have a higher chance of success? It can often be a case of deciding between investing less with more attached risk, or investing more with less attached risk.
Having a thorough understanding of the principles of investment, and how exactly they are relevant to businesses of different kinds and ages, is crucial for a strong investment partnerships
3. What do you bring to the table?
Angels often consider themselves ‘value-added investors’, which means that they find helping to get a new business off the ground just as satisfying as they do helping it financially. The majority of angel investors were previously business owners and have a good understanding of what goes into making a company work. Angels contribute value-added advantages such as industry experience and knowhow, creative thinking, mentoring and industry contacts. When entrepreneurs value investors for more than the finances they bring to the table, they are more likely to get support across every facet of the company.
4. Don’t underestimate the value of mentoring
While a significant part of the job that an investor does for entrepreneurs is mentoring, it is common for investors to neglect to find their own mentor. Having a thorough understanding of the principles of investment, and how exactly they are relevant to businesses of different kinds and ages, is crucial for a strong investment partnership. Becoming familiar with the experiences of investors who aren’t new to the game is a great way of honing this understanding. Placing an experienced investor at the top of the mentorship chain that angel investment inevitably involves is a wise move for investing newcomers.
5. Be aware of exit expectations
Many start-ups expect the involvement of an angel investor to speed up the exit process, but the impact of an investor on exit – and exits in general – tends to be misunderstood. Much emphasis is placed on the start of business relationships, and growing them, and often business exit strategies are aimed at those approaching retirement. Awareness and training on exit transactions for venture capitalists (VCs) has become more common in recent times, which is very worthwhile as the majority of venture capital agreements give VCs full discretion over the outcome – if any – received by shareholders. However, exit strategies have transformed a lot in recent times: more companies than ever are being sold without ever having received investment from an angel, and this is happening sooner in a company’s lifetime than it used to. Many modern exit transactions are worth less than $30 million, and these usually take place a mere two or three years after the business’s start-up.
6. See the bigger picture
A former CEO who went on to be an experienced angel investor explained: “It turns out to be much easier than I expected, and also more interesting. The part I thought was hard, the mechanics of investing, really isn’t. You give a start-up money and they give you stock. But it really doesn’t matter: don’t spend much time worrying about the details of deal terms, especially when you first start angel investing. That’s not how you win at this game. When you hear people talking about a successful angel investor, they’re not saying ‘he got a 4x liquidation preference’, they’re saying ‘he invested in Google’. That is how you win: by investing in the right start-ups. That is so much more important than anything else.”