Why Should a Business Owner Become an Angel Investor?
There are several reasons why some business owners might want to become angel investors.
Many business owners enjoy the opportunity to mentor and support other entrepreneurs. Some may find personal satisfaction in helping other entrepreneurs succeed, and angel investing can allow them to do so while also potentially earning a return on their investment. They may have expertise, guidance, and networking to share, or experience in the industry they’re investing in.
Angel investing can also be a way for business owners to stay involved in the business community and stay up to date on trends and developments in their industry or other industries.
Becoming an angel investor can be a way for business owners to diversify their investment portfolio and potentially achieve higher returns on their capital. Investing in start-up companies has a different risk and return trade-off compared to traditional bonds and stocks.
It is difficult to accurately estimate the percentage of angel investments that make money, as it can vary widely depending on a number of factors, including the quality of the investment, the industry in which the company operates, and the business acumen of the angel investor.
However, studies have found that angel investing can be a high-risk, high-reward proposition. Some research has suggested that only around 25-30% of angel investments generate a positive return, while the majority of investments either break even or result in a loss. However, the potential returns on successful investments can be significant, with some estimates suggesting that the average angel investor realizes a return of around four to five times their initial investment over a period of five to seven years.
Business owners should keep in mind that angel investing carries a high level of risk, and it is not suitable for everyone. Potential investors should carefully consider their financial goals, risk tolerance, and investment horizon before deciding whether angel investing is right for them.
Strategies for Angel Investing
There are several strategies that business owner angel investors can use to make prudent investments:
One of the most important strategies for angel investors is to diversify their portfolio by investing in a variety of different companies and industries. Although it does not guarantee against loss, diversification is an essential aspect of any long-term growth strategy. It can help to reduce risk and increase the chances of achieving positive returns by spreading out your chances of successful and failed ventures.
2. Conduct thorough due diligence
Before investing, angel investors should conduct thorough due diligence on the company and its management team to ensure that the investment is sound. This may include reviewing financial statements, market research, and other relevant information.
3. Seek out opportunities with a clear path to exit
Business owner angel investors should look for opportunities where there is a clear path to exit, such as through a sale or an initial public offering (IPO). This can help maximize the potential return on the investment.
4. Look for alignment with personal values and goals
Angel investors should look for investments that align with their personal values and goals, as this can help to ensure that they are invested in companies that they are passionate about. An exit or liquidation event typically won’t happen for at least five to seven years, and your funds will be tied up in the company for that time. Try to invest in companies that are doing things you truly believe in and that you can feel good about supporting.
5. Seek out experienced mentors and advisors
Finally, business owner angel investors should seek out experienced mentors and financial advisors who can provide guidance, support, and advice on making sound investments and financial decisions. This can help to increase the chances of success and reduce the risk of making poor investment decisions.
Are you a high-net-worth individual or wealthy business owner interested in angel investing? Talk to our Delap Wealth Advisory team today to see how we can help.
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