Angel investing has been in being for quite some time now. There was a period when the investing opportunities for angels were highly unregulated and returns were low. However, in the modern day angels have been able to organize themselves into groups and networks. They are better informed and have a better system of communication with the entrepreneur. Still, there are many risks that an angel investor has to take.
In the investment portfolio of any ordinary person, private investing is the most risky business. That is why specialized investment portfolio management services have come up which specialize in diversifying the interests and investments of the angels.
Why Should Angels Build Investment Portfolios?
The foremost reason why an investment portfolio is necessary is that the business is too risky and there has to be an alternative investment that hedges the risk. When investing money privately, it is important to note that there is a high propensity for small businesses to fold. If there is no diversification of funds, an angel could suffer complete loss of capital.
Angel investing is a great investment opportunity for those who have the money to invest. If an angel is investing in various businesses, there is no telling which of the businesses would sink and which would not. In such a case, making all the investments in private businesses would be like placing all your eggs in a single basket.
How to Build an Investment Portfolio?
The first thing to do while building investment portfolios is to think up of numbers and see how much money you have to invest. The first step towards building a investment portfolio is asset allocation. First determine what percentage of your assets you want to allocate to angel investing. Meet with someone who offers portfolio management services and select a financial advisor. Discuss with your family too, since they most likely have a stake in the funds. Think whether you can afford to lose the money allocated to angel investments. The rate of angel investments realizing their potential is low. Therefore it is better to put only the amount which you consider disposable into this kind of fund allocation. There are good chances that you won’t see your money again and therefore, portfolio investment becomes all the more necessary.
The second thing is that unlike some of the other investment opportunities which will start giving returns quickly, in angel investing, you can expect a wait of about 3-7 years. The angel returns take some time and you need to be indifferent to this timing. A business may take about 3-4 years to stabilise and another equal amount of time to flourish.
Often, additional investment may also be required for a business to flourish completely. At this stage, the entrepreneur may not still be able to get money from venture capitalists and may have to come back to you for additional investments. In order to realise the potential of your earlier investment, you may have to invest a little more in the same business.
Since there is a lack of immediate and regular cash flow from angel investments, the portfolio investment management should be done in a manner that there are other sources from which regular income continues to come in. The investment portfolio needs to be managed in a way that the money is allocated by deal size and the time it takes to realise its potential.
What are the Returns for Angels and Angel Groups?
It has been seen that there are a lot of exits when it comes to angel investing. Angels may review thousands of business plans but choose only a few to invest. There are plenty of factors that influence such a decision. The average return for an investor is 2.6 times of the initial investment. This takes about 3.5 years to realise. The distribution of the returns also varies a lot.
A recent research has shown that almost 52% of the businesses are able to return less money than that was invested initially. Only about 7% of the total businesses invested in, could return ten times the money invested, which accounted for 75% of the returns. These figures are not absolute and may keep varying. However, these can give a broad idea about how the market works and why an investment portfolio is required.
Better selection criteria in angel investing do not mean that there will be higher returns. You may invest money only in people you know, like your classmates, family members or other known entrepreneurs. However, this does not certify that you will get great returns on your money.
Along with making an investment portfolio and hiring investment portfolio management services, it is also important to have an understanding of the people who you want to invest in. It is best to lookout for those individuals who are trustworthy, show integrity and are fully committed to their venture. These people should be energetic and smart and should be willing to look beyond a simple pay check. It is also important to choose people with whom you would like to work with yourself.
The ideal business attributes of a start up which is likely to succeed are low requirements of capital, digital business – because it gives high margins, fair valuation, few employees and recurring revenue. The product being launched should be innovative and have a competitive differentiation. The company should also have a high exit potential.
Apart from the portfolio investment, it is also important to have clarity about what kind of a relationship you want to build with the company. If you are going to be associated with the company right from the stage of inception, you may want to decide what kind of role you want to play. If you want to be actively involved in the company, you may decide to take on a position in the board of become an advisor. Another great way to cash in on your investment is to leverage the returns with additional equity options.