The other day I was listening to a co-founder of a Start-Up pitch his company to a group of about 70 Angel investors. I’m a “Virgin Angel” investor, but I’m really excited about this type of investing. I believe this next decade is going to belong to Start-Ups in India.
I have spoken to a number of experienced Angel investors in India and abroad and I could come up with 7 key reasons why High Net Worth Individuals or successful entrepreneurs should consider being an Angel investor.
The rewards are many, assuming you can check yes to these basic caveats: Personally, you must be willing to lose your investment money, should have a portfolio strategy, and use good investment practices. This high risk, high reward kind of investing isn’t for everyone. Typically 8 out of 10 investments fail.
- Potential Financial Returns – A US study found that the overall return on 1,100 plus angel exits was 2.6 times the money in 3.5 years, or about 27% gross Internal Rate of Return. Not bad compared to other types of equity investments. Even so, it’s important to look into the details. More than 52% of those exits lost some or all of the investment and 7% provided nearly all of the returns.It would be interesting to get similar India relevant research. While the Indian Start-Up and Angel scene is relatively young, as the ecosystem continues to develop and evolve we will see more success.This means that angels need to start with a strategy to make multiple investments to minimize risk and increase the chance of good returns. Typically Indian Angels should also educate themselves on good angel investing processes via events, reading and networking with experienced angels.
Angel investing can also help diversify your overall investment portfolio. A recent SharesPost whitepaper concluded that allocating “5% to private growth companies could increase the returns of a traditional portfolio by 12%.”
- Keep updated with trends & disruptions – Apart form meeting some fascinating forward looking people you really get an idea of some key trends and disruptions happening in the marketplace. It is a great predictor of what may be coming next. As an Angel investor you get to leverage these new trends and get in early. This could be an early indicator into how your own potential industry could be disrupted too.
- Support what you care about– Since angels decide which companies they want to invest in, they can put their own money in the kinds of businesses that are the most important to them. This might be industry sectors you have experience in, or entrepreneurs who are alumni of your university, or supporting a demographic you care about such as women entrepreneurs.
- Know you’re doing good– This is one of my personal favorites. Unlike any other type of investment, startup investing provides the opportunity to invest in revolutionary and life-changing technologies. With the scale of challenges that face India, these new solutions can really create a massive positive impact and as the Modi government is betting on, new jobs! One of my goals in investing in startups is to help generate over a million jobs through the companies I invest in.
- Leverage your industry experience– I have seen successful entrepreneurs load the dice in their favour while making investments. An Angel investor’s expertise in the industry of the venture also related to greater returns. They could understand key pain points in the market, the market potential of a new solutions and help leverage their industry knowledge, mentoring and connections.
- Learn new skills– Angel investing offers something new for everyone. I’m still learning lots of key terms, how to structure deals, how due diligence is conducted, how the best teams work, or the most effective way to mentor entrepreneurs. All of these are relevant for any entrepreneur to progress.
7. Apply current skills in new ways– I have been able to leverage my large network and business growth hacking skills to help mentor Start-Ups post investing in them. Angel investors that interact with their portfolio companies at least a couple of times per month by mentoring, coaching, providing leads, and/or monitoring performance experienced greater returns.