Finding the Right Angel Investing Opportunities
Joe Johnson, Ph.D.
Entrepreneur. Investor. Startup Expert.
Finding a business to support is easy thanks to the internet. However, finding the right business? That’s an entirely different matter. Not every investment opportunity is a good fit for every investor. While online platforms make it easier than ever to connect with entrepreneurs seeking investors, they also make it more important than ever to conduct your due diligence. These tips should make it easier to find your ideal investment opportunity:
What Constitutes the Right Opportunity?
At its most basic, the right opportunity is one that results in a successful business and allows an investor to make money. That said, making an astute judgement on those points, based strictly on a prospectus or business plan, can be challenging. In the right light, most new ideas look promising. Finding the best opportunity for your angel dollars takes research and knowledge – and sometimes a small leap of faith.
Researching Opportunities
Investing requires a curious mind. Not only will you need to learn about opportunities, you’ll also need to research the entrepreneurs behind them and the industries in which they’re positioned.
Asking Questions
One of the biggest tasks an investor confronts is that of asking questions. What better way to understand the goals of a potential enterprise than to ply its owner with questions regarding their goals, experiences, and business projections. Thoroughly vetting opportunities is an absolute necessity. Your goal is to ascertain the likelihood of a business’ potential becoming a reality. You’ll need to ensure that those at the helm are equipped to translate their ideas into a functioning, profitable concern and that the business will be providing a product or service that people need or want.
Active Listening
When plying individuals with questions, you’ll need to actively listen to their responses to not only understand what they’re saying, but also what they aren’t saying. Do they consistently gloss over certain aspects of their plan? Are they truly answering your questions or merely raising new questions? Do their answers engender trust? While your decision should be primarily based on facts, it’s important to also listen to your gut. If you don’t feel as though someone is trustworthy, then investing in their enterprise, no matter how good the business plan appears, may not be the best choice for you.
Reading Between the Lines
There are far too many industry-specific terms that give the appearance of conveying useful information while actually saying nothing. When a business plan or investment meeting is peppered with these phrases, it’s necessary to determine why. Your goal must be to discern not only what an entrepreneur is saying, but to understand how they intend to execute their plan. If any component of the plan is missing or incompletely conceptualized, it is most definitely a warning sign.
Investigating the Industry
If you’re investing in an industry with which you aren’t well-versed, it’s imperative to learn as much as possible about that industry in order to give yourself the best opportunity to make a wise investment. An idea that can appear as revolutionary to an outsider may, to a person with inside knowledge of the sector, clearly be just a boondoggle. One recent example is the Segway, which appeared (to non-transportation industry investors) likely to be a revolutionary product, but proved to be a bust for a number of reasons.
Dissecting the Business Plan
Sharpen your pencils and prepare to parse the business plan from the executive summaries to the financial projections. You need to verify that everything makes sense and that the best available people have been selected for each critical role within the organization. You should also confirm that a clear strategy has been articulated and that projections are based on the best currently available data.
Using Your Knowledge
Once you’ve worked in a particular industry for awhile, you generally come to know quite a bit about the various innovations happening (or not) in your sector. In addition, your work experience can help you to cut through the flowery language of an overly-hyped business plan to reveal the essential data beneath. Practically every new company is attempting to revolutionize something. Your industry knowledge will enable you to recognize the likelihood of a particular idea actually finding success within that sector, thereby facilitating your support of the most promising organizations.
Attempting to invest in an unfamiliar sector presents far more challenges than operating within an industry with which you’re already well-versed. While it’s certainly possible, there is likely to be a longer learning curve and you’ll need to conduct more research, not only into the idea, but into the industry, itself. However, if you have experience running a business, you can leverage that knowledge across the board to help determine the relative feasibility of various business plans and goals.
If you’re an entrepreneur, your unique view of business will be very useful in your investment activities. It’s important to apply what you know about planning, financials, and people throughout the investment search process so you can locate opportunities that most align with your overall goals.
Know Your Strategy
The right investment opportunity doesn’t always hinge on maximizing profit. Prior to beginning your search, spend the time necessary to fully define your mission. This may be more difficult the first time around, but it’s essential to consider your investing goals. Are you seeking to mentor a fellow entrepreneur? Do you want to focus on your region? What industry most interests you? Is supporting your community a greater priority than generating a positive return? Once you’ve decided on the kinds of businesses you’re interested in supporting, you’ll be better prepared to assess the available opportunities and determine which will best align with your personal goals.
Connecting with an Angel Group
Every region of the United States is home to multiple angel groups that help to connect interested investors with vetted businesses in the region. Groups are formed around various missions, with some being industry-specific and others location-specific.
Some of these groups are open to accepting new investors while others are not. Joining one of the open groups may require the payment of membership fees and a minimum annual investment (typically around $10,000). In return, the group will provide information on vetted businesses in the area. Some groups even provide educational events for angel investors to help increase their likelihood of earning a positive return.
An angel group can help you to create an investment strategy and can provide you with educational resources on the geographic region and/or industry that may help you to locate the right investment opportunity. Many groups host Q&A sessions that make it easier for potential investors to learn about various opportunities and the entrepreneurs behind them. Angel groups provide a unique venue for networking with other angels. Some believe that the pooled knowledge available when working with a group increases an investor’s overall likelihood of success.
The Angel Capital Association provides a list of angel groups by geographic region.
Going the Crowdfunding Route
Thanks to the JOBS Act, individuals can now invest directly in businesses online through equity crowdfunding without having to qualify as an accredited investor. This enables greater numbers of people to operate as angels, though there are limits to how much one can invest.
There are numerous equity crowdfunding platforms available. Before investing money with any, however, confirm that they’re registered with FINRA and the SEC as required by the JOBS Act. Their registration status should be easily verifiable. If this information is not readily available, then consider checking another site or directly contacting the platform owners. Never utilize a site that does not abide by the rules set forth by the SEC. Also, consider searching for online reviews of the platform in order to learn more about others’ experiences with the site. When investigating a potential platform, note how much investment vetting they conduct and consider what exactly they expect of you. Some sites will host webinars with startups so that investors can learn more about the ventures. Others will offer no vetting and expect potential investors to perform all of their own legwork. By focusing on your specific needs, you can cull the sites that fail to meet your expectations and expend valuable energy only on those that do.
Checking Your Own Network
If you’ve been involved in a particular industry for a long time, you may be familiar with individuals who have struck out on their own. These acquaintances, whether they be former bosses, coworkers, or employees, likely constitute a potentially rich source of investment opportunities. Your prior experiences with these individuals, properly considered in context, render you highly able to discern a viable (let alone extraordinary) business idea.
If you have friends, family, or business associates operating as angel investors, consider asking them for information on identifying opportunities. You may learn of a new angel network or gain an introduction to an entrepreneur seeking angel investment.
Learning From Others
Most investors have made mistakes at one time or another, which means that there are plenty of people available from whom you can learn to avoid those mistakes. Just as smart pilots review accident reports to improve their own safety (because nobody has the time or luck to encounter and survive every possible circumstance), angel investors can examine the Angel Resource Institute’s 2011 report “Angel Investing: Catalyst for Innovation” in which the group interviewed Super Angels (individuals who annually invest at least several hundred thousand dollars) to see what they’d learned from their experiences, both positive and negative. The information is widely applicable to investors of all levels.
As individuals, Super Angels tend to focus on particular industries, often the industry in which they themselves worked as entrepreneurs. This gives them keen insight into what does and does not comprise a good idea. They also tend to focus on the startup team. Many angel investors interviewed looked for teams that were obsessed with their business, who had a singular focus, and a drive for success. They invested in people who truly believed in their venture and who were willing to fight tooth and nail to make it a reality. At the same time, they preferred to support those individuals who were honest and approachable.
The Angel Resource Institute and the Angel Capital Association (as well as books written by successful angels – and this site!) can provide you with more insight into the angel investing process.
Timeline For Finding the Right Investment Opportunity
There are no hard and fast rules for angel investing, but there’s a lot of good advice available for those willing to learn the ropes before getting their feet wet. While it may be tempting to write a large check to the first worthwhile opportunity you find, it’s important to regard your investing activities as a whole. How many angel investments do you want to make each year and how much cash are you allocating for your investment activities?
Angel investments are high-risk due to the nature of startups. Most new businesses fail. Putting your proverbial eggs in one basket is not a good strategy for those seeking a positive ROI. Rather, divide your available investment funds across different opportunities. Articulating an overall strategy can help you to better allocate your investment dollars and make your investment activities more profitable (and enjoyable!) overall. For example, if your angel investing goal is to assist in creating a viable startup culture in your community, that can help you to direct your capital. Others may focus on particular industries or on mentoring entrepreneurs with whom they share certain ideas or qualities.
Finding the right investment opportunities can take time, but it’s well worth the effort. The amount of time and effort you spend on your investment activities is up to you. What’s most important is that the path you choose is one that aligns with your goals. If you prefer to do your own vetting and research, that’s fine; be sure to utilize the information provided by different angel organizations to help with your quest. If you prefer to work with an angel group that takes care of the vetting, that’s good, too; ensure that your interests and beliefs align and that you trust their techniques.
Ultimately, the goal of angel investing is to support startups that aim to bring something new into the world. Choosing the right opportunities will result in financial benefit both to you and to those companies in which you invest.
FURTHER READING
ABOUT THE AUTHOR
Dr. Joe Johnson is an entrepreneur, investor, and startup expert. He is the founder and principal of GoodField Investments and the GoodField Foundation (www.GoodField.com).
Joe has a Ph.D. in Entrepreneurial Leadership and an MBA. He is the author of the upcoming book on The Science of Why Most Entrepreneurs Fail and Some Succeed.
Most importantly, he is the incredibly blessed husband of one amazing wife and father of six wonderful children. He resides in Bradenton, Florida. For more information on Dr. Johnson and his work, go to www.JoeJohnson.com.
Categories: Angel Investing