The role of angel investors in getting the best from investments

The role of angel investors in getting the best from investments

With angel investment being more popular than ever and an increasing amount of entrepreneurs looking to attract the right angel finance with their business plan, as an angel investor you will know that the right business plan only comes along so often. Of the many angel investors I meet, one thing is clear amongst almost all an that is the need for more effective business plans showing better potential and understanding of the market. Too many entrepreneurs limit their opportunities by writing weak business plans. Great ideas are common; much rarer are businesses with the people and products to enter a market and make a real impact or dominate.

But apart from ensuring that the businesses they are identifying spend sufficient focus on market research and te development of effective business plans, the angel investor also fulfills a range of other roles. At the end of the day most angels have been there and done it before. They know what success looks like, what the obstacles are to look out for, how to get past these and importantly, the kind of commitment needed to ultimately succeed.

Companies don’t build themselves. People build companies. Ultimately, an angel investor is selecting a management team. A great team can make even a mediocre company achieve reasonable success, whereas a company with the best technology will not be successful with a mediocre management team.

Always be on the lookout for opportunities to help the startup. An angel often has industry networks that can be great sources of valuable information. Entrepreneurs can become so focused that they do not realize major trends are shifting or simply do not have time to network appropriately if they are deeply involved in product development, for example. Angels can be the eyes and ears of startups, and angels can help find good potential employees through social networks. Angels can also find other angels and venture capitalists for further rounds.

Diversify your risks by investing smaller amounts in more startups. Angel investments should be less than 10% of your portfolio, due to the risks of potential losses. The portfolio approach is key: estimates suggest that angel investors lose their investment in one-third or more of the companies they fund. Set aside at least the same amount you invest in a startup so you can make follow up investments in future rounds. This will allow you to retain your percentage ownership or at least mitigate its dilution.

Fund deals that you’ve shown to venture capitalists who have indicated they will fund future rounds if certain operational goals are met.

Angels who lead the due diligence process and sit on a board on behalf of other angels should be compensated with a small percentage of equity. The best board members are angels with relevant operating experience, not those with the deepest pockets.

Do not overcontrol the entrepreneur. There is a reason why the entrepreneur has started his or her own company: he or she prefers to run the show. Even though an angel has provided capital that does not give the angel the right to wrest control from the founder, except of course if the business is not meeting its operational goals.

Angel investors provide significant value to the overall economy by fueling entrepreneurial activity. Angels are distinct from venture capitalists and, although the demarcation line is blurring, angels continue to be the true initial investors in great ideas.

Without angel investment, the entrepreneurial landscape certainly will be poorer in more ways than one. But as with business itself we need to continuously strive to be more effective at what we do and how we do it. Taking some of the responsibility for the success for the companies you are investing in as the investor certainly is one step we can take to move towards a more effective relationship between entrepreneurs and investors.

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