Angel Investing is a popular topic of conversation in the media as a result of the Federal Government's National Innovation and Science Agenda and the recent changes to the tax laws around Capital Gains tax relief for early-stage investments. However, as an asset class investing in early-stage companies is high risk and carries many unforeseen pitfalls. To help educate people who are considering becoming an Angel Investor I have provided my Top 10 hints and tips for getting started.
1. Take your time
A typical error I see with people new to Angel investing is they fall in love with and invest in the first deal they see. It is exciting to be at the coal face with an entrepreneur as they pitch their idea and you see their vision and the huge potential of the idea. However, you need to see a lot of deals to provide you with a valid benchmark. Hold yourself back from investing in the first deal you see because you may find something far better downstream. As a rule of thumb I typically make one new investment per year.
2. Join an Angel Investment Group
Most state capitals have a formal Angel investing group. These are long established (some over 10 years like Capital Angels which was formally incorporated in 2005) and have very well credentialed investors who have been doing this for a long time. Many members of our group have been doing this for more than 15 years and have more than 10 deals under their belt. Their experiences and advice is incredibly valuable. Find your local group here:
- Capital Angels - http://www.capitalangels.com.au/
- Sydney Angels - http://www.sydneyangels.net.au/
- Melbourne Angels - http://melbourneangels.net/
- Brisbane Angels - http://www.brisbaneangels.com.au/
- Innovation Bay - http://www.innovationbay.com/
3. Seek Advice
Similar to point 2 above seeking guidance and advice from someone who has done this before will save you falling into the numerous bear traps that exist in this sector. If you don’t want to join a group find one or two ‘buddies’ who can help mentor you through your first deal.
4. Educate yourself
There are numerous training and educational opportunities for the uninitiated. At Capital Angels we run periodic education events where we specifically focus on the uninitiated. These are formal workshops run by battle hardened investors who can help fast track your comprehension of this difficult sector
5. Look at some deals
The best way to understand this space is to immerse yourself in some real deals. You don’t have to make an investment at the end of the process but going along during the exploration and due diligence of an opportunity will be invaluable. You can find deals at any Angel group. These events typically present 3 or 4 opportunities per meeting.
6. Read up on the subject
There are some excellent books on the category – some of my favourite are:
- Angel Investing: The Gust Guide to Making Money and Having Fun Investing in Startups – David Rose
- What Every Angel Investor Wants You to Know: An Insider Reveals How to Get Smart Funding for Your Billion Dollar Idea – Brian Cohen (this is from an entrepreneurs perspective)
- Angel Investing: Matching Startup Funds with Startup Companies--The Guide for Entrepreneurs and Individual Investors - Mark Van
7. Start with a modest investment
Angel deals are typically in the range of $200k-$600k. In total this looks like a lot of money. You don’t have to provide all or even the majority of it. For your first deal try to invest a modest amount $10k-$20k and see what you learn from your experience. Consider it an investment in your education! All opportunities will need further capital investments downstream so save some of your powder to follow-on. You will be able to assess the progress made between your first investment and the next investment opportunity.
8. Invest as part of a syndicate
Many new angel investors think that it is best to keep a great deal to yourself. This is simply not true! The best strategy is to invest in a syndicate. A syndicate is a group of like-minded individuals who come together for the specific purpose of investing in a company. You still invest using your own vehicle but you benefit from the wisdom of the crowd in the deal assessment, deal construction and deal management processes. Syndicates form at Angel groups (See 2 above).
9. Invest using the right vehicle
Many investors do not have an appropriate vehicle to make their investments and use their own name to make the investment. This does not optimise any future tax position or provide any arm’s length protection if things go wrong. It is worth looking into the benefits of a family trust or using a SMSF to make the investment.
10. Only invest what you can afford to lose
Many of us have extended families as part of our tribe. Angel investing is high risk with the possibility of the complete investment being lost. It is critical to assess your own personal circumstances to consider this is the best use of your dollars at this stage of your financial life. Given the choice between paying off more of a mortgage versus making an angel investment you should pay off the home loan! You really need to be in a comfortable financial position with your home loan paid off before you start to think about Angel Investing as an asset class.
About Nick McNaughton
Nick has a long track record of helping to build and grow software and web companies, and has been a successful angel investor, business mentor, CEO & Fund Manager. Building on sixteen years of experience in bringing US software companies into the Pacific, Nick turned to personal and professional investment in domestic software companies in 1998. He specialises in web / mobile / cloud / SaaS and Enterprise opportunities. To date he has made seventeen Angel Investments losing his money five times. He has also had some wins including Vocus (ASX: VOC) & Soulmates Technology. He is currently invested in ImageBrief, ingogo, HeyYou & Windlab. Nick has been a Venture Fund manager since 2007 and currently is the CEO of ANU Connect Ventures a fund backed by MTAA Super. Nick has an Honours Degree in Computing in Business from The University Huddersfield in the UK, has an MBA from the University of South Australia and is a Graduate of the Australian Institute of Company Directors. He is a former Chair of Capital Angels, was a founding member of Sydney Angels, and currently sits on the Board of Entry29, a co-working space for Canberra start-ups.