Long-term angel investing: understanding capital requirements and how to find quality investments

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Why angel investments? There are three main benefits of angel investing if you are in the tech industry: financial, educational, and professional. Which benefits are most important to you will significantly shape your approach as an investor.

Everyone dreams of becoming a seed investor in companies like Google or Facebook, but the reality is that there are very few such companies. However, angel investing offers a return potential that can greatly exceed the public markets. Over the past 11 years, I have invested in 120 private companies, mostly at the seed stage. Financially, the results exceeded all expectations. My first “fund”, 23 companies I invested in from 2012 to 2014, had a value of 21.2 times the total cash invested and an internal rate of return of 48.6% as of May 31, 2022.

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However, it is important to start angel investing with realistic expectations of financial results. Most professional venture capitalists are considered the top quartile if their returns are greater than 3x return on invested capital over 10 years, and 5x return would place you in the top 10%. It takes a lot of arrogance to assume that you, as a new investor, will get the same return, given the advantages that professional investors have.

Financial returns are not the only benefit of angel investing. As an investor, you can also offer educational opportunities that are not available in any other way. First, angel investing gives you a front-row seat not only in setting up a company, but also in legal and financial processes in private markets. For many operators who have only held technical positions, the role of investor can be a learning experience.

Secondly, most people stick to products and businesses they understand well for professional roles, but this can be a very limiting factor. As an angel investor, you gain access to the implementation of strategies, products and businesses that you personally do not have the right to directly manage.

The main reason most angel investors fail is that they do not understand how much money it will take to be successful in the long run.

Thirdly, an angel investor can provide significant career advantages, especially if you work in the high-tech industry. As an angel investor, you have the opportunity to build new relationships not only with the founders, but also with other investors and company employees. Every investment is a chance to build a new network, and networks with weak links often open up surprisingly valuable new opportunities. These benefits increase over time as one investment often leads to another, and these new networks begin to overlap and reinforce each other.

More importantly, as an operator, by seeing how other founders and teams present and act on their vision, you can improve your own capabilities. Most of us have limited experience in the companies where we have worked directly. As an angel investor, you can increase this risk by 10-100 times.

How much can you afford to invest?

Unfortunately, the root cause of most angel start-ups failing is that they don’t think clearly about how much money it will take to be successful in the long run. More often than not, the main problem that people do not take into account is the lack of liquidity in private market investments.

Credit: techcrunch.com /

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