There are significant differences between investing in a start-up company. Differing from investing in shares traded on the stock market or in real estate. Sale of the startup or issue the same investment can yield a very handsome.
An angel investor is an individual who invest in start-up, usually in exchange for convertible debt or ownership equity.
Diverse investment portfolio
Assuming that the average angel investor does not have infinite capital. There is an advantage in spreading the amount of investment between several start-ups. Such a move helps to spread the risk. As well as increases the chance of an exit event that will atone for potential losses in the investment portfolio. Carefully select and try to reach startups with the highest potential. As in many cases, there are additional factors beyond the company’s ability to perform. Market forces also play a role and sometimes luck. It should be remembered that this is a long-term investment. Patience is the keyword, especially when the investment horizon of 5-8 years for an exit event.
Cash flow access
It is difficult for a private investor or angel investor who does not spend most of his time filtering and meeting with entrepreneurs to know where it is better for him to invest his capital. You can take advantage of filtering factors such as venture capital funds. Such as Capital raising platforms or of course personal acquaintance with leading angels investors (private investors) in the industry.
These factors provide the most unique entry ticket for private investors to join investments in these companies. In addition, at the beginning of early investment rounds, the valuation (startup value) of the transaction is low and therefore the risk, as well as the potential for return, is relatively high.
Lots of big angel investors, always look for the most important factor in start-up investments. For some, it first and foremost in human capital – the talents. It is important to check the resume of the entrepreneurs, whether they are serial entrepreneurs (previous exits). Equally important, they need to have a long-term vision. Moreover, the team is cohesive . Of course make sure the entrepreneurs create harmony and complement each other in all areas (technology, management, marketing etc. ‘)
Business Model and Competitors
It is necessary to examine the industry in which the company’s a product/service is located, that the market will be large enough, who their competitors are (maybe there is even a buying potential) and what the company’s relative advantage is over these competitors. Also, check that the product/service meets the needs of the target audience. In addition, you need to examine the business model. Moreover, check that the company has a monetization strategy that will provide them with a startup with breathing space over time.
First of all, in order to know the expected shareholding rate in the startup, one must know the valuation. Before the investment and the size of the total investment round in order to divide by the amount of both the investment amount and get the holding percentage in the company. Another important thing to check in the company’s legal documents is the type of share granted. In the case of an exit, the first money will first flow to the preferred shareholders before it reaches the regular shareholders if at all. Equally important to check whether you as an angel investor have information rights. For example, regarding the company’s progress and future participation rights in the event that additional investment rounds apply.
Further investment option in the same startup in the future
Start-ups go through a number of investment rounds in their lives. From the seed phase which usually revolves around formulating the idea and developing the initial product. As a result, to advance to rounds such as A, B or C. For instance, there is already a product alongside sales and revenue for the startup. There is a likelihood that the company in which you have invested will hold another round of investment. In order to maintain your relative share in the shareholding, you will be able to invest an additional amount in order not to be diluted. Investing in angel rounds is usually possible and worthwhile. If you believe in the company and its ability to move forward.
In advanced fund rounds, it will sometimes be more difficult to participate if the value of the company is very high. In any case, it is common to expect a 20-25% dilution for an investment round in which you choose not to participate. At this point, I will emphasize again that investing in start-ups should come from available capital.
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Investors in the startups
If there are already investors in the company, it is recommended to perform a background check on them. Consequently, see if they provide added value to the startup n addition to the money they have invested. The ultimate option is to join capital raising rounds. With this in mind, look for known angels inv which there are already recognized and experienced angels. In order words, a resume of previous exits, expertise in the specific industry in which the start-up works or serve as mentors and consultants to the startup and entrepreneurs even after the investment has been made. Another contribution of such angels with extensive experience in the industry is the fact that they have already performed due diligence for the startup and probably if they have made an investment it is indeed worthwhile and in addition, everything is legally correct in the same startup.
How will the start-up use the funds they raised?
How the money is going to be invested? What are the marketing and development goals? How the startup intends to reach them? What is the percentage of the distribution of money between the various areas and what are the milestones on which each action is going to take place? Of course, it is recommended to invest in startups that deal with areas that are familiar to you as an investor, so that you can more professionally evaluate the startup’s strategies.
If you haven’t mastered the investor terms, we highly suggest going over 62 Investment Terms Beginning Angel Investors Should Know.