Up-and-coming entrepreneurs live their early careers in the spotlight. Their efforts are the centre of attention — when it comes to doling out advice, the metaphorical line of well-intentioned advisors who want to tell the beleaguered founder what they should do to attract and keep investors’ attention often seems to stretch on for miles. For aspiring investors, however, the situation is somewhat different. The entrepreneurial community’s close focus on the would-be founders can come at the — sometimes literal — expense of the person on the other side of the boardroom table in relative obscurity.
For all that shows like Dragon’s Den depict venture capitalists and angel investors as brutally honest and often dismissive business veterans, many of the apparent “dragons” in the investment field are almost as new to the game as the entrepreneurs they sit across. According to a joint report from the British Business Bank, IFF Research, and the UK Business Angels Association, around 17% of angel investors have under two years of experience in the field, while a full 44% have under five years. Like any other undertaking, investors need experience to thrive — and given that the average angel contributes between £10,000 – £500,000, the learning curve has the potential to be expensive.
Mistakes can be costly. Below, I’ve noted a few stumbles that every aspiring angel investor should avoid if at all possible.
Not Taking Proper Precautions
Investment can be financially and professionally rewarding — or it can turn into a disaster. As with any other financial endeavour, angel investing comes with a certain degree of risk; statistics provided by the UK Business Angels Association suggest that as many as 58% of angel deals leave the investor without profit — or even the stake money they had initially contributed.
Aspiring investors need to think strategically and do their due diligence to preserve their capital. The most effective way to mitigate the potential for loss is to diversify your portfolio effectively and ensure that your financial health isn’t dependent on the success of one or two of ventures in the same sector. Aspiring investors in the UK should also take advantage of the government’s Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS), as both schemes are specifically designed to incentivize investment in smaller or higher-risk companies by offering tax relief. They certainly succeed in drawing in investors; one recent market report found that 86% of respondents said that they typically — if not always — use EIS or SEIS, while a notable 58% admitted that they would have invested “less or not at all” if the schemes weren’t in place.
Straying Beyond Your Expertise
Odd as it might seem, even years of experience as an entrepreneur won’t necessarily prepare you for a role as an angel investor. Former Dragon’s Den star and investment veteran James Caan puts the matter well in an article for the Financial Times: “What most people do is — because they have built up a business, sold it and made money — start to believe they can run any business.” Caan himself made this very mistake; he put money towards a venture in the tech sector and promptly took catastrophic losses because, as he says, he “knew nothing about the key drivers of the technology market.”
Up-and-coming investors need to stay within their realm of expertise — or partner with someone who has complementary experience.
Investors can sidestep the expertise boundary and mitigate their share of risk by joining an angel syndicate. Syndication is an increasingly popular option among angel investors; researchers at Deloitte estimate that around 73% of investors in the sector contribute in a collective. These groups collaborate to find better investment options, lessen their individual contributions, and benefit from a shared knowledge base. Syndicate investing is also an invaluable opportunity for newer investors, as it empowers aspiring angels to hone their skills and gain experience within a reduced-risk environment.
Unlike more distant venture capitalists, angel investors tend to work closely and personally with the entrepreneurs they support. The money these investors offer does, after all, stem from their personal funds — why wouldn’t they want to take a more active role in ensuring that the seed funding they provide helps that business grow?
However, misaligned expectations between entrepreneurs and investors can turn one-promising business relationships sour. A founder, for example, could seek out an angel investor for their hands-on advice and industry contacts — and quickly realise that the investor doesn’t have the time or inclination to help in the way the founder expected. Alternatively, an angel investor with a background in entrepreneurship, for example, might hope to provide strategic advice only to find that the founder doesn’t want their hands-on intervention.
The latter situation can become particularly awkward, as investors do tend to have more of a voice in a company’s strategic planning as they purchase more of its shares. It’s in an angel investor’s best interest to establish expectations early; if they don’t, they run the risk of trapping themselves in hostile and costly business relationships for years on end.
The learning curve for angel investors has the potential to be costly, stressful, and unrewarding — but it doesn’t have to be. With enough support and care, up-and-coming investors can collaborate with their peers and investees to gain experience without undue risk. Setbacks happen on the path to investment success — and while they tend to be costly, they are rarely impassible.