Angel investing: 5 factors to consider
Many investors with a high net worth are often intrigued by the idea of angel investing, especially if they have been business owners or entrepreneurs in their own careers. While angel investing sounds like it would be fun as well as lucrative, investors should carefully consider five factors before deciding to invest.Risk
Investing in startups usually has more risk than investing in established companies. Entrepreneurs often have so much enthusiasm for their idea that it’s easy to get carried away, so it’s important to analyze the business plan carefully. You may want to make sure the company can address a large enough market and that they have clear insight into their competition before you agree to hand over the funding. Although you shouldn’t invest with the assumption that you will lose money, it is a good idea to not invest more than you can afford to lose.Return
Since you will be assuming more risk with angel investing than with other potential investment options, you should likely expect a higher rate of return. Balance your potential capital loss against the potential for a high return that could substantially increase your wealth. Most successful angel investors have a target return in mind before they invest, and part of understanding the return you can expect is knowing your exit strategy and target exit date; so make sure you have these details worked out upfront. You may want to align your expectations with those of the business owner so that your capital is not tied up for a longer period or at a lower return than you had planned.Portfolio balance
Angel investing is exhilarating, and it may be a very important part of your wealth management strategy. Even so, you will want to ensure that you balance your portfolio carefully. Research from the 2015 BNP Paribas Global Entrepreneurialism Report shows that on average, angel investors allocate less than 10% of their wealth to startups and angel investing opportunities and nearly 20% of the total to cash reserves. The balance is usually spread over a variety of investments to manage risk and generate returns in line with the individual’s goals and tolerance for risk.Geographic region
Even in a global economy, regions go through economic cycles independently, based on a variety of social, economic and political events. Every portfolio should have a regionally diverse mix of investments to help manage risk. With angel investing, the regional mix becomes even more crucial because of regional differences in the attitudes and expectations of business owners and entrepreneurs. For example, in Hong Kong nearly 20% of angel investors cited “the sale of the business” as the measure of success, but only 12% in the U.K. define selling the business as a goal. Nearly 34% of entrepreneurs plan to invest in Asia Pacific, followed by 33% in Western Europe and 27% in North America, according to the BNP Paribas report.Sector
Many entrepreneurs who are angel investors tend to focus on a small number of sectors, with financial services being the top choice at 16%.
Basic principles of wealth management recommend spreading investments across a range of sectors to manage risk, and angel investing is no exception to this rule. While you may find that opportunities abound in these sectors, be wary of concentrating too much wealth in a single sector.Conclusion: Don’t forget fun
Angel investing presents a unique opportunity to invest in sectors and ideas that excite your imagination. The opportunities for angel investors are almost limitless. You may choose to invest in businesses focused on your area of expertise, or those that address a cause you care about or that are in a region of the world that intrigues you. Angel investing provides a rare opportunity to add fun and excitement to investing while still balancing risk and reward.