Stretching Your Wings With Angel Investing

Finance | Provided by Cornerstone Advisors

Those looking for a more hands-on investment might want to consider angel investing. Here’s a quick introduction to what you should consider before adding angel investments to your portfolio.

An angel investor is a person who assists the founders of fledgling companies to succeed by providing financing. They look for new, innovative companies that can grow quickly in sales and value, investing directly into the businesses in return for a share of ownership. But the relationship typically runs much deeper. Many angels are entrepreneurs themselves, or are corporate leaders or business professionals. While the angel investors expect a financial return, the relationship tends to run deeper than merely a financier. Serving as a mentor, the relationship inspires creativity, provides valuable products and services, encourages community, and creates employment.

Aside From Investing Money, What Do Angels Do?

Angel investors do not just write checks, they provide ongoing support for the entrepreneurs. Examples of the assistance are: Customer acquisition, personnel, strategy development, and resources such as office space and accounting. In addition to strategic and operational expertise, angel investors also assist with development of social capital. Social capital is defined as “networks of strong personal relationships that provide the basis of trust, cooperation, and collective action.” This is often as important to entrepreneurs as the financing itself.

It’s important to note that investing in early-stage companies is risky and can mean a complete loss of your investment. Investors should plan to commit at least 20 hours of due diligence per investment. Additionally, investors must be able to diversify across a number of different companies. Being part of a group of angel investors, which we will get to shortly, can help you screen companies and conduct research.

How Are Angels Different From Venture Capitalists?

Angel investors generally invest their own money in start-ups and very early-stage companies, while venture capitalists (VCs) primarily provide capital they have raised from others to later-stage businesses for growth. Because of the risk of early-stage companies, angel investors are required to be “accredited” (high net worth). In addition to investing money on behalf of others, VCs are also often more actively involved with management of the companies they invest in than are angel investors.

What is the Best Way to Engage in Angel Investing?

When you pursue angel investing, be sure to consider this undertaking from a portfolio-allocation perspective and a certain understanding of your ability to do proper research. First, consider that angel investments are almost always illiquid (that is, likely to be tied up for a number of years) and that it is recommended that they only comprise 5-10% of your portfolio. Then, determine your time commitment as well as experience and ability to perform due diligence. Finally, determine your ability to deal with a loss in your portfolio.

What is an Angel Group?

An angel group is an organization where individual angel investors join together to evaluate and invest in entrepreneurial ventures. The Angel Resource Institute lists 385 American groups in its database. The structures of angel groups vary, as do their selection processes. Many of the groups are run by professional staff, but some are run by volunteer members. In most cases, the angel groups have events in which selected entrepreneurs are invited to present their companies. After the presentation, a few members of the angel group perform due diligence on each company and its situation relative to the related marketplace. On conclusion of the due diligence, a decision is made—either by the whole group or by several members—whether to make an investment.

It is generally easier and more efficient for entrepreneurs to find angel groups than to identify individual angels, and groups often become the central connectors of deals in their communities. Examples of angel groups in Bellevue/Seattle are the Alliance of Angels and Keiretsu Forum (the two largest) and Element 8, which is focused on clean tech. The Seattle Angel Fund provides investors a way to invest in a fund format, and thereby diversify across five to seven launch-stage companies in many industry sectors.

Angel investing comes with a high degree of risk, but if done thoughtfully and prudently, can be a worthwhile and valuable endeavor. In addition to the possibility of adding to the return from your overall investment portfolio, you can further the societal goal of increasing access to capital for entrepreneurs.