Learn the Risks
Angel investing is financially and personally rewarding. However, the opportunity costs of the investment along with the risk of negative ROI could be financially daunting. Acknowledging these risks allows for ways to mitigate them.
- The statistics seem to be against Angel investing. Out of every ten (10) deals, only one or two may result in positive ROIs. Furthermore, breaking even and returning a profit might take several years.
Mitigation Tactic: Diversify your portfolio by spreading investments among a number of ventures and industries. Delving deeper into the statistics, the positive ROI obtained from one to two businesses out of ten (10) tend to exceed the negative ROI obtained from the unsuccessful ventures.
- Unlike conventional investment instruments such as stocks or mutual funds, Angel investments are illiquid. An Angel investor can not usually sell their stake in the business to minimize loss.
Mitigation Tactic: Pick a venture that you have industry experience or expertise in. At first, you will be able to properly assess the product and market opportunity. Thereafter, you will be able to provide insights to keep the business on course or avoid it from veering off course.
- A person who has entrepreneurial experience is not necessarily investment savvy, whether it’s you or a member in your Angel group. Consequently, the venture may appear to have more or less potential than it actually has. In the case of the former, the investment will be misguided. In the latter, it will be a missed opportunity.
Mitigation Tactic: Evaluate the business plan and other documents through an investor’s, not an entrepreneur’s, lens. After committing your funds to the venture, ensure post-deal monitoring procedures are in effect. For example, review annual reports, be present in quarterly board meetings, etc.
Despite the financial risks, Angel investors continue to press forward because the rewards outweigh them. In fact, Angel investing is thriving and the Angel community has been growing since 2003.
Being a member of an Angel group greatly mitigates the risks associated with Angel investing. Refer to the Become an Angel section to learn how.