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Ask an Angel: How do I become an Angel Investor?


angel investorThe following excerpt is from an Angel Capital Association article on December 21, 2010.  The full article can be found at the Angel Capital Education Foundation website


December 21, 2010

We asked three experienced angel investors, Jean Hammond of Hub Angels Investment Group, Launchpad Venture Group, and Golden Seeds, all located in the Boston area; Bob Goff, founder and chairman of Sierra Angels of Incline Village, NV and recipient of the Hans Severiens Award; and Steven Mercil of RAIN Source Capital in St. Paul, MN and lead instructor of the Power of Angel Investing, to talk about the what, why, and how of becoming an angel investor.

ACEF: Just to level set, why do people get into angel investing?

JH: There are lots of rational reasons. Early stage equity investing done directly is a good asset class. Done right, this asset class can out-perform other things. You get to use your smarts, your Rolodex, and your ability to interact with other smart people to the benefit of your investment. You know the person you are investing in. It is local. It is creating jobs right in your neighborhood. There is the sense of being there and doing the right stuff. All of those things make a combination of rational, economic, and morale good sense.

For me, the working with smart people and the energy from the smart entrepreneurs is a blast.

ACEF: So how do people figure out if they want to be an angel investor or not?

SM: We get questions from investors about how to become involved with angel investing almost every week. Most of our inquiries are people who have made money and want to leave some kind of legacy and pass their experience and knowledge on to someone else as well as make an ROI. They want to help an entrepreneur grow a business and experience the challenges. They know this is important work.

First, they need to be an accredited investor according to the Securities and Exchange Commission.

JH: Assuming that's the case, there are three basic paths for potential angels that I've seen. One is to have been an entrepreneur and internalized the receiving of investments process to the extent that you now feel comfortable being on the other side.

The second is to go and see how other people do it and shop for an angel group that works for you. This works best where there is more than one angel group and existing activity. Many times people come as guests to angel group meetings. They listen to other people talk about the decision to be an angel at a fairly high level and then down to more nuances.

The last path is more like an apprenticeship. Find someone who is doing angel investing-maybe someone who is blogging or is around your area-who is willing to have you tag along.

ACEF: Angel investing takes time as well as money.

SM: That's right. If you are going to be an angel investor, you have to decide how much time you can commit to this activity. If you don't have the time to be involved, if you want to invest passively, then invest through a professional venture capital manager.

BG: For general education on entrepreneurship and angel investing, we suggest people visit the Kauffman Foundation, Angel Capital Association (ACA), and ACEF Web sites which contain a wealth of valuable information. We also encourage all new Sierra Angels members to participate in a Power of Angel Investing seminar, preferably in their first year.

SM: I also steer people to the ACEF and the ACA sites. If they don't know much about angel investing, I highly recommend they attend one of the Power of Angel Investing (PAI) programs. Almost every time I've taught a course, there is a percentage of audience that has not been familiar with angel investing at all.

JH: We are doing classes here in the Boston area that will include a session on "so you want to be an angel." This will tell participants whether they want to be an angel and what they feel comfortable with.

SM: I also recommend that a person think about the kinds of companies-industry, stage, and location-they like to deal with and how much of their net worth they are willing and able to put at risk.

ACEF: Let's talk about risk. Angel investors seem to have a tolerance, almost an appetite for risky deals.

BG: Investing in any early stage businesses is inherently highly risky. Within an asset allocation context, this segment should generally represent no more than a single digit percentage of net worth (except, perhaps, in special situations). However, when done well and right it can be a highly rewarding activity.

JH: I'm of the opinion that people have an understanding of their own risk profile that helps them figure out whether or not they should be an angel investor and how early a stage of angel investor they want to be. I also think that understanding doesn't come from an extremely rational place.

The other day I heard myself saying that super-early stage angels are born not made. The list of people who like really early stage investing is small.

By their nature, lots of angel groups tend to end up at the "mid-stage" of what is actually the early stage of a company. They skew toward what I would consider a stage of risk that is often equated with market entry stage. The company has something ready to sell and they have to find people to buy it. The reason groups end up a bit later than individual angels is that by the time a diverse set of people feel ready to write a check-the company is at a later stage.

SM: Often angels need to be prepared to make more than one investment in the company. They need to assess whether they can create a viable portfolio within the limits of the time and money they have to invest.describe the image


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