Finding the right investment can be challenging, here are a number of factors to consider that may increase the likelihood of success:
- Having the right attitude when it comes to risks. While big returns are possible, don’t forget, you could lose all of your investment. Only invest if you can afford to lose.
- The ability to spread the risk. A successful Business Angel often has a portfolio of 10 or more investments. Fewer than ten investments could be too small a portfolio given the high chance of failure of individual deals.
- Diversification. Having a diverse portfolio is another means for spreading risk. With equity being a very illiquid investment: your capital could be ‘locked up’ for many years. Therefore, Angel investments should not make up more than 10% of your overall net assets.
- Research. Due diligence is essential when it comes to making investments. Studies have shown a direct correlation between the level of due diligence and the success of an investment. Investments where the investor has spent at least 20 hours on due diligence have been seen to experience significantly fewer failures.
- Patience. Be prepared for unforeseen delays and failures. Business plans will be revised and exits rarely take place when first planned and good exits tend to take time.
- Planning. Don’t just hope that exits will happen: ensure the investee is working towards an exit from day one.
- Objectivity. Becoming emotionally attached to a failing investment is linked to poor returns. Sometimes it’s better to walk away rather than put more money and time into a failing investment.
- Keep cash in reserve. In order to build up a successful portfolio it will likely involve follow-up rounds of investment. A good rule of thumb is to allow a 200% reserve for follow-up investments.
e.g. if you are making individual investments of $5,000, you should be able to make an overall commitment of $150,000 (assuming a portfolio of ten companies with a 200% reserve for follow on investments) and have an overall net worth of $1.5million (so that angel investments make up only 10% of your overall assets).