What is Angel investing?
Karen Wendt, SFTL President & expert in responsible, impact and sustainable investing
What is Angel investing?
All businesses need money. Startup ventures need money to get started. They need ongoing injections of capital and access to cash to keep growing. Today, that seems like a virtually indefinite need. It is not about just ‘getting funded’ and then being set once and for all.
You may be surprised at the financial needs of companies that are even bringing in billions of dollars each year.
Angel investing is happening on the private markets, so there is no market price that builds on the vast amount of liquidity on the stock market. Therefore, you have to do your own valuation of the company.
Angel investors can invest in start-ups, early-stage companies, and growth companies that are not yet listed on the public market. They carry a higher risk, and you need to be savvy to understand their business model, financial needs, the size of their market, and how much they will be able to capture. You want to see their roadmap and financial model and come up with your own valuation of the company. This requires a greater and more sophisticated toolkit than just for investing into pubic market where you get the market price that builds up on the stock exchange.
Diversify your portfolio.
It is also advisable to have an entire portfolio of companies you invest in; if you just invest in one startup, you have a concentration risk. If the startup fails, your money is gone; therefore, savvy angel investors build up a portfolio of around 30 assets. With 30 assets, you can profit from the portfolio effect, reducing your risk dramatically.
Therefore, you need to know how to create a portfolio where the risks of the various startups cancel each other out instead of creating a compound effect. As investing in such early-stage companies also has various phases, from pre-seed with very low valuations, seed, series A,B, C, and D, to venture capital, followed by private equity,
Do not worry too much about this jargon; we will explain it at length in our training. Important to know, however, is that investing from the early stages up to venture capital is risky, but it also provides a risk-adjusted return. That means your impact, your influence as a strategic investor, and your return are much higher than with investments in the stock exchange. Venture capital funding also means finding the right startups and growth companies and understanding how you can be not just their financial fuel but their strategic partner.
I hope you got a glimpse of angel investing, where it happens, and what you need to know. Next time, let us talk about the pros and cons of doing it.