Wednesday, February 2, 2011

How to become an angel investor

Although very popular and commonly used in countries such as the US and UK angel investors are less well known in South Africa. An angel investor is normally a high net worth individual who chooses to get involved in the funding of new or growing businesses. These angel do not only bring with them much needed financial resources but also knowledge, contacts and experience that can be of huge benefit to the entrepreneur. The idea from the angel investors point of view  is obviously to find a promising business plan service  or venture, invest capital, resources and time into the business and sell his/her stake in the business once that stake is worth much more. So the investors automatically has a real vested interest in the business being a success.

So why would you want to become an angel investor and how do you go about it?

Well first of all you can easily join a local Investors Network where investors and entrepreneurs are matched up. A sort of dating agency if you like for angel investors and entrepreneurs.

The reasons why many wealthy individuals want to become angel investors vary considerably. Some people seek a means to employ themselves, while others want to create jobs for their families and their future generations. Some really enjoy helping other start-ups succeed, while others simply have a hedonistic approach to investment, taking pleasure in risk-taking in a company’s success. In addition, there are those who are only interested on the economic gain and rate of return on an investment. Regardless of the reason, many angels share a few things in common:

   1. Their average investment is anywhere between R50K to R500K,
   2. They tend to invest in smaller amounts (ideal for early-stage development) in a number of deals so that they can have a diversified portfolio,
   3. Even though profitability is their primary incentive, angel investors have local investments that promote community development and job growth.

To become an angel investor takes more than just personal wealth for a desired investment. According to Howard H. Stevenson, Sarofirm-Rock Professor of Business Administration at Harvard Business School, “reading business plans, studying in business school at angel seminars, and learning an industry by working in it” are ways that “one can develop expertise that will promote success in investing.” For both the entrepreneur and angel investor, Stevenson claims that “there is nothing like doing it,” referring to working and having experience in a given field.

In addition to having experience, angel investors should also define their personal and financial goals, and invest with those who have a solid track record when assessing any potential business opportunities.

   1. Personal and financial goals- Angel investors must share the same goals as the entrepreneur in order to avoid some unpleasant, long-term surprises. These include everything from overall company prospective, strategic sales, salary distribution, exit strategies, etc. It is crucial to identify and see eye-to-eye with all of the underlying goals of the entrepreneur before making any financial commitment.
   2. Experience- Lots of angel investors were once entrepreneurs, and according to Lon McGowan, founder and CEO of iClick, “have been involved in many successful companies of their own.” Therefore, they not only have the financial means to invest in young companies, but they also have valuable industry and marketing experience to support other young, hopeful companies, making them excellent advisors and mentors.
   3. Capability- The most successful investments were made by entrepreneurs with triumphant experiences; therefore, an investor’s track record is the single greatest component that may be indicative of one’s overall potential.

William Sahlman and Howard Stevenson, from Harvard Business School, have proposed a basic framework for each investment opportunity/entrepreneurial evaluation as a three-sided model in which four vital components are organized and well-interconnected:

   1. people,
   2. context,
   3. business opportunity,
   4. a deal

Not only is each individual component crucial for a successful investment, but the way they interact is also just as significant. A high-potential business opportunity occurs when there is the right arrangement or combination of each element, whereas poorly arranged/combined elements or lack of one or more of these essential components will lead to failure. The Harvard Framework is as follows:


PEOPLE- refer to any significant stakeholders of the company, including the entrepreneur, team members, investors, advisors, etc.

THE POTENTIAL BUSINESS OPPORTUNITY- refers to the business proposal/plan, the consumer, the size of the business, etc.

CONTEXT- refers to the external factors that can influence the success of a business, including industry trends, the state of the economy, consumer supply and demand, technology development, etc.

DEAL- refers to the contract between an entrepreneur and an angel investor, including the terms, agreement and pricing.

There are five requirements that Micah Baldwin, an angel investor who sold his SEO consulting company, looks for in every business opportunity:

   1. A leader/CEO- this individual should be competent in operating a business and dealing with the various challenges of their company. They should be trustworthy and exude confidence to those who follow them.
   2. A real revenue path/exit strategy- an investor should envision the marketing success, outlook and expectations of the business.
   3. Active involvement- every angel should be actively involved in their business venture. They can support the company by mentoring, giving advice, and even work behind the scenes.
   4. Avoiding convertible debt- this is a no-win situation because when an investor makes money, there is very little interest; however, when the company fails, their stock is of insignificant value.
   5. The desire to invest with other “quality” investors- often times,  when an investor approaches every business opportunity with this method in mind, more than likely, others should heed their strategy.

So if this sounds like something you would like to get involved with why not become part of an Investors Network today and/or go to the next networking event organised. Who knows you may just find the perfect business plan to invest in.

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