Every angel investor has to start somewhere, so with that in mind Jeanne Lee at Fortune Small Business offers a few tips for first time angel investing.
– Don’t go it alone.
…”[A] single investor or a small group of four or five can get too emotional about deals.”
Angle networks, which either informally or sometimes more formally join together a group of angel investors, have become quite common in cities across the US. These networks help the angels create more structure to their deals and allow them to invest smaller amounts in more deals, thus reducing their overall risk.
– Follow your passion
“When you combine investing with your passion, you get a great sense of satisfaction.”
Just because you are now on the other side of the table, it does not mean that you have to give up things that your are passionate about. If you care about fighting cancer because your personal experience, for example, you may want to focus some of your investment money in that market space. It does not mean that you throw caution to the wind and invest with your heart. You still need to search for the right deal. But having a focus may help limit the deals you want to look at.
Passion can also go along with your past experience from when you were an entrepreneur. If you believed in your industry as an entrepreneur, don’t give up that passion when you become an investor. That industry was good to you once, and it can be good to you again.
– Locate the exit
“Some entrepreneurs think that angels are banks, that the angel will give them the money, then wait around for years until the entrepreneur returns it to you with interest.”
Only invest in a deal that has a clear exit plan in mind. Your should not plan to park your money in a deal for more than three to seven years. Some deals may end up being longer term, but you should never go into a deal with that in mind. You and the entrepreneur must clearly have the same aspirations for growth and exit. Study the industry to make sure that the exit plan the entrepreneur presents makes sense.
– Befriend the vultures
“Make sure the term sheet is user-friendly to the VCs who will come later.”
In today’s world of high growth venture investing, angels most often provide the seed or early stage money. Know the likelihood that the deal will need future rounds of financing, and if there is even a remote chance that it will, structure the deal in a way that will make in attractive to future investments by VCs. Some angels try to protect their investment from possible future dilution only to block any VC interest in providing needed Series A financing later. That can actually limit possible returns for the angel by limiting the upside potential of the deal.
By the way, knowing how angel investors work is also important for the entrepreneur. Making sure you understand the deal from their perspective increases your chances of gaining angel money and working well with them once that money is invested in your business.