A Three-Step Guide To Becoming An Angel Investor

Independent Board Advisor, CEO, consultant, angel investor.

As your business grows and thrives, you will no doubt become a more prominent figure within your community. Sooner or later, a young upstart entrepreneur will take notice of that prominence and find a way to reach out with their “once in a lifetime” opportunity for you to invest. Though you may see yourself as wearing a halo, are you ready to become an angel investor?

Angel investing might interest you on a personal level. If you have a good team in place and your business is running on autopilot, getting involved in a startup can get you mentally engaged in a challenge again and bring a new thrill. Alternatively, angel investing might fit a need for your business itself. It can act as an incubator for new ideas, foster a culture of innovation, and even diversify the revenue streams of the company for added security.

Early-stage investors are subject to many risks and rewards. You should review each in turn before deciding to commit your money, time and potentially reputation to such an endeavor.

Your first thought will usually be towards the financial rewards. Dreams of 20x, 50x and 100x returns will dance in your head. While those events happen, you must remember the big wins are less common than the little wins, which are less common than outright losses. Investing is a close cousin to gambling and the size of your bets should be thought of similarly.

Start With Honesty

Setting aside the desire for financial rewards, let us look at some of the qualitative rewards. There are many non-monetary aspects to angel investing that can be attractive to successful businesspeople. Some enjoy mentoring young entrepreneurs, some use it to stay mentally active in retirement, some enjoy the prestige of being an “angel investor,” while others see it as a hobby no different than golf. You could be motivated by all of these and more, but be honest with yourself about what you are looking for as it will help you identify the best opportunities to invest in.

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Understand The Business Model

With your intentions clear, start by understanding the business model. If the business model does not make sense to you, the business will likely never make sense. It will be easiest to understand a company that is in the same or related industry to your family business. Use your contacts, knowledge and business platform to give yourself an edge with these opportunities.

Look At Future Investments

Consider how open you might be to future requests for capital, beyond your initial investment. Startup companies often need injections of cash to fuel growth for years. Many first-time investors will put in a large amount initially and then become uncomfortable with adding to the investment in later rounds. You should consider the amount of your portfolio you are willing to invest in this venture before the first check and plan on future requests. Relatedly, always ask for pro-rata rights, or the ability to add to your investment later and avoid dilution.

Angel investing can bring a fair share of joy and pain. Like most undertakings, there is always more to learn, and experience is the best teacher. Remember that your business was once a startup too and by contributing to the angel ecosystem you are helping other businesses grow. Angel investing is a way for you to help build the next generation of successful companies.


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