Angel investing has become a popular method for Startups to secure funding and launch their businesses.
Angel Investors usually don’t have the same level of resources as larger Investors but their contributions can still help make an entrepreneur’s vision a reality.
To attract an Angel Investor, it’s important to understand the type of Investor your Startup needs. If you’re interested in investing in Startups yourself, you should think about which strategies will work best for you in finding the next big opportunity.
One way to start is by examining the characteristics and successful practices of successful Angel Investors.
Different Types of Angel Investors: Understanding Momentum, Value, and Alternative Investors
There are three types of Angel Investors. Angel Investors are wealthy individuals who provide financial support to Startups. The three categories are momentum Investors, value Investors, and alternative Investors.
Momentum Investors rely on intuition and foresight when making investments. They make decisions based on emotions, instead of hard data.
Value Investors, on the other hand, focus on a company’s financial stability when making investments. David Verrill, the founder and managing director of Hub Angels Investment Group, is a renowned value investor who carefully examines a company’s revenue before making an investment. He typically reviews a company’s financial data from the past 12 to 24 months to determine its future potential.
Finally, alternative Investors are unique in that they want to send a message through their investments. Instead of investing in traditional stocks or bonds, they focus their investments in specific areas, such as health care, antiques, or wine, with the goal of creating a meaningful impact.
Catherine Mott, founder of BlueTree Capital Group and BlueTree Allied Angels, is a prime example of an alternative Investor. Her organizations aim to help entrepreneurs establish successful businesses through private equity investments and ensure local start-ups have access to the financial backing they need.
Investing with Passion: Strategies of a Successful Momentum Investor
Momentum Investors invest in ideas and entrepreneurs that ignite their passion.
Have you ever wondered why there aren’t more individuals like Bill Gates? The answer is clear- not every business idea has potential. It’s a challenge faced by every aspiring Investor.
So, how do to determine which businesses are worth supporting? Angel Investor Brad Feld, a well-known momentum investor, has a few effective strategies.
Feld believes a potential investment must contain three key elements: a passionate entrepreneur, positive initial product feedback, and a long-term relationship.
According to Feld, an entrepreneur who is passionate about their idea has potential. After all, how can a business leader excite customers about a product if they aren’t passionate about it themselves? As an Investor, however, Feld feels it’s crucial that the product ignites his passion too.
Even the most exciting products can fail, so before making an investment, Feld tests the product with the company’s target audience. For example, if Feld is interested in a Startup selling all-natural sweets, he’d share the product with his family and friends to assess its market potential. If the feedback is positive, and his family and friends feel the product is missing in the market, it’s likely that Feld will decide to invest.
Finally, Feld considers whether he would still invest in the company for the long-term, even if he were only to play a minor role. In this element, Feld doesn’t place much emphasis on the experience or past achievements of the Startup’s founders. What matters most is that connection between the business and the Investor. Only when this connection is strong, and the business has passed his other two criteria, will he choose to invest.
The Method Behind Value Investing
Value Investors, like David Verrill, founder and managing director of Hub Angels Investment Group, rely on financial data to assess the potential of a Startup. Hub Angels invests in local, low capital-intensive companies with growth potential in areas such as diagnostic and health-information technology. However, the group avoids high capital requirements, such as pharmaceutical companies, that Verrill deems unprofitable.
What sets Hub Angels apart from other angel Investors is their follow-up investment strategy. Instead of offering a one-time investment, Hub Angels continues to invest in the company at key moments to maximize returns. This strategy was exemplified in their investment in the company Localytics, which raised $16 million from other venture capital companies after two investment rounds from Hub Angels. When a Startup becomes successful and no longer needs support from Hub Angels, the Angel Investor’s role is complete.
Advantages of Short-Term Investment Relationships for Investors and Founders
Angel Investor David Bangs joined the Northwest Energy Angels investment group in 2007 and focuses on clean technology investments. He believes that a good investment strategy should provide a quick exit for both the Investor and their money. In situations where a company is not set up for this, Bangs suggests purchasing shares with the condition that the company owners will repurchase the shares at an agreed price if the Investor wants to exit.
This approach benefits both Investors and founders. For Investors, it offers quick access to their money, and for founders, it provides the opportunity to repurchase a percentage of shares, increasing their ownership stake and potentially leading to a bigger exit in the future. For example, if a start-up has a 40% margin and allocates 5% of its returns to repurchase shares, its effective margin becomes 35%, which is an attractive result for shareholders.
Working with other Angel Investors can provide added support in decision-making.
As an Angel Investor, it’s important to have a set of principles and strategies that guide your investment decisions. But, making investment decisions alone can sometimes be challenging. That’s why having a network of fellow investors can be incredibly beneficial.
Catherine Mott is an Angel Investor who understands the value of working as part of a group. She believes that having a diverse group of investors can help to provide a more well-rounded perspective on potential investment opportunities.
For example, if you become overly excited about a Startup’s idea and don’t fully consider the potential challenges or risks involved, other Investors in your network can offer critical feedback to help bring you back to reality and make a more informed decision.
Catherine is also mindful of the importance of evaluating the management abilities of Startup founders. She takes the time to assess the team leader’s suitability for the role, as well as the team’s ability to work effectively together and handle criticism.
After evaluating the management team, Catherine then takes a closer look at the target market and business model or product. This process can take anywhere from four to six weeks, but it is crucial in reducing the risk of failure and ensuring the start-up’s financial strategy is sound and sustainable.
As an Angel Investor, performing due diligence is crucial in order to make informed and successful investment decisions. This includes thoroughly evaluating your investment target and seeking a second opinion from other Investors. Different Investors have different investment strategies, such as momentum Investors relying on personal connections and intuition, while value Investors focus solely on the numbers. Alternative Investors invest in causes they believe in, with the goal of creating a positive impact.
Having a mentor who is experienced in investment can also be incredibly beneficial for Angel Investors, especially for those who are new to the field or unfamiliar with a particular investment area. A mentor can provide valuable insight and advice, and potentially prevent costly mistakes by providing guidance on whether an investment is likely to be successful. Overall, seeking guidance from a mentor can greatly enhance an Angel Investor’s chances of success.
Inspired by a book “Start-up Wealth”; Josh Maher