Investing in startups used to be something only millionaires and the über wealthy could afford or even think about.
However, in recent years there has been a steady increase in the number of private investors – particularly angel investors – entering the market.
Testament to the growth is the fact that while in 2006 there were only three angel groups in Australia, now there are around 15 (compared to 400 in 2010 in the US). According to the Australian Association of Angel Investors (AAAI), in 2010, angels invested $1 billion in emerging businesses. In the US, there were 268,160 active angel investors in 2012 and they mostly invested in software, healthcare and retail.
The number of wholesale investors (individuals with over $250,000 annual earning or $2.5 million net assets per ASIC) – not just angel investors, is over 200,000 in Australia. Accessible technology, a global marketplace and increased networking opportunities have made it relatively easier for new investors to be part of a startup without setting up the business themselves.
Angel investment is a growing trend for high-risk investment. And, as with other trends, it is being shaped by stories of success. Fired by tales of stellar returns – especially from Silicon Valley, and the thrill of being part of something new, more people are getting a slice of the growing Australian entrepreneurship industry. Angel groups and incubators such as Pollenizer, Sydney Angels and Starmate are giving a helping hand to those interested in testing the waters. Crowdfunding platforms and organisations such as female entrepreneur focused Scale Investors are challenging the traditional models that considered an average investor a middle-aged male with high income and, encouraging new entrants into the market.
Angel investments typically range from $25,000 to $2,000,000 – the latter amount being on a significantly higher scale. They usually look for a good team with a great product that could potentially return 10 times their initial investment in 5 years. Many angel investors have previous experience in traditional personal investing or trading and are usually interested in investing in companies with less than 20 employees. Most look for scalable businesses that have the potential for growth and and a clear plan for profitability.
My personal journey into angel investment started from a background in trading equities. I used social media to grow my networks by offering small social and ethical investment grants to other startups – focusing on issues such as literacy, women-led initiatives and youth empowerment activities. This gave me a foundation to start my angel investment portfolio. One of my investments includes events software company iVvy, which recently launched a world-first platform for the business events industry.
If you have extra funds and want to give angel investment a go, here are some points to consider.
Why are you getting into the game?
The first step with angel investment is to figure out what you want. Although financial returns might seem like the obvious answer, there are a growing number of people who do it for the lifestyle – to be part of the Silicon Valley buzz or receive awards for artistic projects. There are others who do it for positive social impact or to support a cause / passion.
An example is film producer Megan Ellison (Oracle founder Larry Ellison’s daughter) who funded American Hustle and Zero Dark Thirty. She is reputed to fund strong stories that wouldn’t normally get picked up by bigger Hollywood studios – and, not necessarily bring in the big bucks.
It is not like the stock market
Angel investment is different to trading in equities or investing in public markets. Investors are typically more hands on and involved in the company and its direction. There is no easy cash-in/ cash-out strategy and you can’t predict risks as you would with stocks and mutual funds.
When you invest in a company, you usually buy into equity and not just a percentage of profits or revenue. The share of investment can’t be easily divested, taken to the bank or cashed when you need money.
Personal investment and history of entrepreneur
Determining the value of a startup is more art than science. Your judgement is based on the history of the entrepreneur and how personally they are invested into the company. I chose to invest in a company where the founder had a solid history of building prior startups and managing financial exits.
Know whether you want to invest in someone who has a history in managing startups or a young graduate with the next killer idea. Neither of these options are failsafe. You invest in ideas and people, so be sure you believe in the product and also look around at what is being said about the company and / or industry in social media and news.
You don’t have to do it alone
There are many active angel groups/ communities that you could join in Australia. These groups will put you in touch with businesses looking for funding. Joining group’s gives you combined opinions, advice and more networks to tap into. More seasoned members may also be willing to teach you the ropes.
However, groups will need you to invest a certain amount every year as membership fees and also require you to be present at more events, meetings and screening processes.
Think about your timing
Know at what stage of the business you want to invest in. While early investment into a business has the potential of getting more equity for your money, the risk is higher due to teething concerns of the new venture and not knowing market acceptance for the product.
Investing after the business has been operational for a few years will increase the valuation and often result in less equity; but is less risky and offers quicker exits.
In Australia, angel investment is fast becoming more popular than venture capital with more entrepreneurs, new ideas and innovation shaping the market. The AAAI estimates that investments made by angel investors generated 5,000 jobs in 2010. In addition to financial success, angel investors are helping shape the industry at a micro level that is in turn impacting large-scale economic growth. If this interests you, think about becoming someone’s angel.