The highs and lows of being an angel investor
Angel investors provide a valuable source of capital to start-ups while often acting as mentors, but they are a high risk venture for high net worth individuals
All businesses need funding for growth and success – and when it comes to raising this capital, start-up entrepreneurs typically struggle the most. Perceived inexperience and lack of collateral make them a risky investment for many traditional lenders, resulting in the need for alternative avenues. One such alternative is finding an angel.
Angel investors are often experienced entrepreneurs or business people themselves. A recent study by HSBC Private Banking into the hearts and minds of 3,725 successful high net worth entrepreneurs globally finds that nearly half have made such investments. Those in the US, mainland China and the Middle East are most likely to have made angel investments.
Valued growth enablers
Angels support growth in the broader economy not only by providing a vital source of risk capital but also by mentoring the start-up community. While motivations behind this vary, many entrepreneurs are cognisant that they owe their successes – at least in part – to those who have helped them along the way and so want to give back where they can.
“The value of a seasoned investor is their experience,” says Scott Lester, a British entrepreneur and angel featured in HSBC Private Banking’s Essence of Enterprise. “As an investor, your value to a start-up is not giving money but giving them the benefits of the metaphorical scar tissue you have.”
As a seasoned investor, your value to a start-up is not giving money but giving them the benefits of the metaphorical scar tissue you have
Indeed, on one hand angels act as connectors – advising entrepreneurs and opening up their little black book of contacts to make the necessary introductions. On the other, as private investors, they adopt a longer-term view on their investments than venture capitalists, giving start-ups more time to scale their business.
The right approach
Perhaps unsurprisingly, differences between the younger and older generations of angel entrepreneurs exist. For example, the study finds younger entrepreneurs approach angel investing with greater appetite than their older peers – with almost six in 10 business owners under the age of 35 having made such an investment, compared to just three in 10 of those over 55.
Younger investors perceive angel investing as an activity which is critical to their networking and development, and as such they are open to leveraging a broader range of formal and informal channels to seek out such opportunities. This is especially notable in France and the UK, where crowdfunding platforms are emerging as a popular means to sourcing investments.
Meanwhile, older entrepreneurs view angel investing as a private activity for diversifying their portfolio and therefore tend to rely on their network of existing personal contacts to source such opportunities.
Angel investments are high-risk ventures and need careful consideration. “What most people do is because they have built up a business, sold it and made money – they start to believe they can run any business,” says James Caan, serial entrepreneur and a former investor on the BBC television programme Dragons’ Den. This however, is not the case – a lesson Mr Caan learnt personally after losing money in a sector he knew little about.
Perhaps this is why almost two-thirds of angels choose to invest in businesses which align to their own professional experience and a majority (70 per cent) apply similarly strict due diligence standards to these as they would to their other investments.
In this context, perhaps this is also why crowdfunding platforms are emerging as a popular approach to identifying interesting investment opportunities. For example, at the seeding stage – the first round of raising capital – they can help establish a start-up entrepreneur’s brand or profile and generate a buzz.
“With the help of these platforms, [entrepreneurs] can demonstrate that their idea created substantial interest and attracted a strong community of early adopters,” explains Aurélien Drain, head of business development at HSBC Private Banking. “Once the business is more mature, it is easier to approach more formal channels such as banks, corporate groups and entrepreneurs.”
Angels play an important yet often unseen role in supporting the entrepreneurial ecosystem. While approaches to and motivations behind angel investing can differ, many of the core principles of collaboration and knowledge transfer remain universal. Angel investors should therefore continue to share experiences, find new ways to mutually leverage finance and spread risk to encourage new angels to become vital participants in the market.
Jenny Kvaskova is a senior analyst at wealth management think-tank Scorpio Partnership
