Three Simple Rules to Become an Angel Investor
Angel Business Club
So you want to become an angel investor?
Investing in private companies – before they reach the public markets – can be one of the most lucrative investment strategies in the world.
There are famous examples of private investors and venture capital (VC) firms making a fortune with early stage companies. Private investors in Uber, for instance, turned $30,000 into $149 million… $50,000 into $248 million… or even $510,000 into $2.5 billion.
So yes, investing in private deals can be very lucrative.
However, until now it has been reserved for the ultra-wealthy and the super connected. It’s a sort of a dark art. It involves high-risk decisions every time an investment is made or about to be made. And angel investors have to deal with imperfect and incomplete information.
So let me give you Three Simple Rules to Become an Angel Investor and you’ll have a better understanding of what we do at the Angel Business Club.
Rule One: Understand the Fundamentals
The first rule seems obvious. But you would be surprised how many angels get stuck right away because they can’t assess the value of the technology or the market opportunity. Does the technology make sense? Is there a clear vertical (i.e., a narrow market where the tech can flourish) for this tech to be deployed in? Is the company doing something entirely new and unique? Or is it just moderately better than what already exists in the market today?
For instance, ABC invested in Smart Trade APP. Without getting into the specifics, this company has radically transformed how transactions are made with their Pay by Bank app. It’s a brand-new technology, not a small upgrade of an existing system.
Understanding the core technology and the market opportunity is essential before making any investment as an angel investor.
Investors who can’t answer these questions correctly end up making bad investment decisions over and over. They lose money. They are gambling rather than making informed investment decisions.
Rule Two: Practice Patience
Investing in private companies is very different than investing in public markets.
Investors can purchase shares in public companies one day and resell them immediately if they want.
With private investments, that’s not an option… Private investments, for the most part, are completely illiquid.
Private investors must wait for what’s known as an “exit”, or a “liquidity event”, to take money off the table. Typically, an exit means the private company is either acquired by a third party or goes public, allowing private investors to sell shares in the public markets.
An angel investor might be sitting on profits as high as 250,000%. But if the company never exits, guess what? All those profits remain just paper-profits.
If you want to become an angel investor, you’re going to have to be patient and wait for these exits. Very patient.
What is usually said in the Private Equity industry is that a first major exit will likely happen within seven to eight years from the first investment, although private investors may sit on a deal for 10, 15, or even 20 years waiting for an exit.
Do you have the emotional fortitude to wait that long for a return? If you want to be an angel investor, you’ll have to be prepared, to cultivate patience and be completely comfortable with the prospect that there will also be some losses.
Rule Three: Let the Numbers Work for You
Rule three is something I recommend to all investors, even when investing in public companies. You need to build a basket of early stage companies in which all have great investment return potential. In other words, you need to let the numbers work for you.
It may surprise you to know that as many as 75% of VC-backed companies never return money to early investors. What that implies is that most investments made by venture capitalists actually fail.
An important rule to being successful as a private investor is to cultivate a large basket of private deals and let the law of the big numbers work for you.
Many of the investments will fail completely. Some might return your money with a modest profit. And a small percentage can go on to deliver life-changing returns. It’s these “jackpot” investments that make up for all your losses and then some.
That’s why a large basket is so important. While I may have an idea about which companies are going to deliver extraordinary returns, in fact, there is really no way to tell for sure which ones will be successful.
I hope you understand now how committed you need to be to invest in this asset class on your own.
Unless you are well-connected and have a very large amount of capital to deploy, breaking into the private investing space is difficult… perhaps even impossible for some. This has been one of the most unfair dynamics in the investment world for the past decade.
On the other hand, you can see the benefits the Angel Business Club is providing you, carefully selecting these early stage companies, curating, nurturing them and preparing the exit for you… in time.
We are changing the game !
All the best,
João de Saldanha
Angel Business Club
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