Monday, July 30, 2012

Angels: Don't Fall From Grace!

Though the recent economy crash did not diminish new ideas, it did create a change in how angel investors should view their roles within a start-up.  As a graduate student in Northwestern's Medill IMC program, I study how start-ups create profitable, successful companies. I have learned that it is hard enough to break even, let alone make a profit for angel investors; however, part of that reason is because they do not know when or how to walk away from a deal.

The standard practice for angel investors is to choose companies that will give you ten times your investment within five years. In an article by Paul Graham, he tells you to aim even higher! However, I agree with Dave Balter, CEO of BzzAgent and think that instead of searching around to make what is, in most cases, an unrealistic return on your investment, get smart and start planning ahead with a strategy that gives you a quick return in a short amount of time. With this strategy, you can continue to invest in other small companies to make your money back...and then some.  

Angels will face many challenges throughout their investing careers, but an understanding of potential barriers will allow for more successful investments. First, understand that a positive return is not based on how much money you initially invest, but rather on the success of the company. For this reason, be selective and only pick original ideas that show potential within the marketplace. Even new angels need to understand the fundamentals of being a smart investor which include learning about the start-up teams, their business models, plans for the future, marketing tactics, and other investors. Second, recognize that dilution happens! As companies become more profitable and get more valuation, it is likely that more angel investors or large venture partners will come on board and either phase you out or lessen your amount of shares within the company. The best approach an angel investor can take is to be prepared for dilution and have an exit strategy in mind to stay ahead of the game. Angel investors have a unique opportunity because they have the potential to find ideas first as larger venture capitalists tend to wait and invest once a buzz has already been established.  Angels have the power, but need to know what to do in order to use it properly. Mashable's spotlight of successful angel investors may be of particular interest to those considering becoming an angel investor or wanting to be a better one.

From my examination of angel investments, here are several things you can do to improve your results:

  • Give the Venture Capitalists What They Want: Sell the venture capitalists your shares in the company so they will gain more ownership, you will make more money, and the entrepreneur will not get diluted and can still feel comfortable working with you.  
  • Take Less Risk in Your Investments: Understand that companies will fail.  Know when to stop funding so you can see more of a return and start investing in new opportunities.
  • Stay in the Know: Avoid being phased out! Know and understand where your money is going at all times.
  • Discuss in Advance the Role You are Expected to Have: Do this prior to making a deal so that you understand your expectations on whether you have a role of a silent partner, an employee, etc.
  • Be Active in the Community to Find the Next Successful Start-up:  Attend events, talk to friends (and more importantly, other angel investors), and keep your name out there so start-ups know who you are.

Angel investors face many challenges as they are competing for ownership with other angels as well as large venture capitalist firms.  However, if angels can concentrate on their roles and know when to get out of a deal in order to invest in new opportunities, they will have a greater return on their investments.  Understanding and following these key strategies will allow angels to make wiser decisions and, therefore, better investments.

Heather Steinberg has worked at several start-ups in her career and is currently the Research Manager at Lab42, owned and operated by Sandbox Industries. Here, she has the opportunity to help other start-ups learn their niche in the marketplace and create product offerings.  Her background includes gathering consumer insights, data analysis, strategic marketing, and survey writing.  Born and raised in Atlanta, she received her BAJ in Public Relations and BSED in Sports Studies at the University of Georgia.  Currently, she is pursuing her graduate degree in Integrated Marketing Communications at Northwestern University.  When Heather isn’t working or studying, she likes reading, running, enjoying Chicago, and watching Atlanta sports. She can be reached at @HeatherIMC.

No comments:

Post a Comment