While angel investing groups have been around for decades, it has become easier in recent years to connect angel investors directly to entrepreneurs using online platforms. As a result, there is less interference, fewer restrictions and bigger opportunities. While many angel investors boast great success stories, there are also lots of ways to lose money.
There are some important steps to making good startup investments. Many angel investors never consider that they play a role in the outcome of their investment. At my company ZipBooks, our initial outside funding was led by a venture capital (VC) firm, but we consciously included angels based on the value they would bring. I’ve seen the process up-close, so I have some ideas about what works and what doesn’t, what’s helpful and what isn’t.
Here are my five top tips for angel investors, because when investors and entrepreneurs work together, the chance of success is so much greater.
1. Look for companies that know how to pivot when it’s time
Pivoting, or changing course in order to take advantage of a better, previously unseen or ignored possibility, is a huge benefit that startups have over big corporations. Smaller businesses are more agile and can pivot with a lot less risk, with upside for reward. Angel investors need to look for businesses that either already have a great track record of being able to pivot, or for businesses with the opportunity to do so right now.
By bringing in a fresh perspective, you may help direct a course down the most-likely path for success. Imagine if you were an investor in Twitter or Slack before they made their big pivot – where would you be today? ZipBooks started with free software before pivoting to a premium model with additional services to drive more revenue per customer. You should only invest in a company that is open-minded enough to consider a pivot. A company too set in its ways may not be the best place to guarantee a return on your money.
2. Be diligent in your due diligence, but within reason
While it’s easy to understand you want all of the information you can get your hands on to make a smart investment, there’s a point in the due diligence process where you can go too far. Although entrepreneurs should be happy to answer questions, pulling at every thread and guessing what might happen will deteriorate the relationship you are trying to build.
3. Take a cue from Shark Tank and invest in people
The Shark Tank programme often features a business that is so-so but they still get a great deal. You’ve also probably seen a great business, one with all the right numbers and a super smart strategy, totally tank. Why? Because savvy investors recognize the power of people. When a person has conviction and determination, when they have a story that makes you listen, when they wake something up in your gut that tells you to trust them – you probably should. People are what make or break businesses. And, when you have a feeling that the person behind a company is someone that is going to succeed, it often turns out that way. Nothing is guaranteed when it comes to investing, but in startups, you can guarantee that if the people aren’t right, neither is the investment.
4. Be involved, but keep your hands off the wheel
As much as I’m sure you love the idea of being the biggest asset to the business, most companies don’t really need all that much help. Lack of capital, which is where angel investors like you come in, is typically the biggest barrier entrepreneurs need help overcoming. So, while you can offer sage advice and unique perspective, don’t become involved in everything that’s going on inside the business. If you’ve made a smart investment, the company really isn’t going to need much of your help.
5. Don’t count on one investment being enough
In order to maximize your investment return, you need to take a diverse approach to angel investing. The most successful angel investors have a portfolio of businesses in case one of the investments turns out to be a dud. While there are always stories of one-and-done successes, the chances are as likely as overnight success or an entrepreneur’s first business being the only one he’ll ever need. If you want to ensure you’re being a smart angel investor, spread your funds around. This means that if you don’t have enough money to invest as an angel in a few different businesses, it might not be the right time now.
Jaren Nichols is Chief Operating Officer at ZipBooks. Jaren was previously a Product Manager at Google and holds an MBA from Harvard Business School.