Private investors or ?angels? are usually affluent individuals who invest money, time or ideas in ventures with hopes of above average returns. The return on investment or (roi) for this type of investment is generally substantially higher than that of traditional investment strategies, such as stocks or bonds.The other aspect of making these types of investments is the feeling of personal pride and satisfaction one feels from doing something worthwhile and meaningful. Let's face it; if you had the opportunity to earn a 9% roi investing in the stock market or a 400% roi investing in a start up company that makes products that save lives, which would you chose? This may seem like an obvious answer to most, but to actually commit to an investment of this kind takes a special kind of person. It takes an angel. Most of the private investors out there have been in the same shoes that you are in right now. They were full of great ideas and had boatloads of potential, but no capital to launch their ideas with, until someone helped get their foot in the door. Perhaps some of these entrepreneurs are looking to be mentors, just like they had when they first started out.
So who are these angels and where do you get one? The answer is that they're all around you and you probably don't even know it.
Private investors took hard hits in the late 90's with many privately funded internet companies folding. Most of these investors were relatively unsophisticated, investing in start ups with no solid business model or real assets. When the bubble burst, it went fast, and investors lost billions. This scenario could have been avoided by both the start ups and the investors doing a little homework first. Consequently, the angels still making investments tend to be the more sophisticated, weary type. What are we getting at with all this? If you don't have a solid idea, proper credentials, the right team and the strength and determination to accept rejection; then stop reading this now. The journey you are about to embark upon is a long arduous one. But, if you are strong enough to persevere, the rewards will be greater than any setback you encounter. The satisfaction you receive from taking a company from nothing, raising capital for it and making it a success is immeasurable.
Copyright 2006 David Rapp Ventures
Most of us who qualify as accredited investors or qualified investors know, that most of these venture investments will fail. How do you choose the next big angel investment?
Here are a few things to look for:
You want people who are totally dedicated to their business, not those who are trying to make a fast buck on the latest fad. If they have the company logo secretly tattooed on their arm, they are for you. If they say things like ?If this tech thing doesn't work, I can always go back to truck driving? then run! Your team must be willing to take those strong pains that are the growing pains of a small business.
Smart investors always avoid unfair deals. Let's face it, in almost all startups seeking seed money, the proposition boils down to ?With our brains and your money, what have we got to lose?? The investors should get a big enough piece of the company that if it wins, they win big, because most startups seeking see money will fail.
Granted, deals that favor the investor de-motivate the entrepreneurial team and are also to be avoided. The deal should also be structured to allow the investor to come in and pick up the pieces if the deal goes bad. Most investors won't want to, and even if they do, there is likely to be nothing to salvage, but give them a prayer.
The investment proposition should be fair. I find that valuing companies seeking venture capital, particularly if they are startups, is very hard. Only hindsight can tell you what the value is. However, it is easy to see that you should get an expert to tell you what the investor expects.
Seed money investors are looking for character in management. There are several indicators of this. The first is a successful track record.
The next is that the handling of investor funds is transparent. Inventory that cannot be verified does not exist.
Another sign of character is a scrupulous adherence to the securities laws. Anyone who invests in a deal where the principals are ignorant of the regulations, are making unlawful sales of unregistered securities, and who are paying illegal finders? fee and commissions to unlicensed securities ?brokers? deserves everything they inevitably get. We know that the securities laws are almost impossible to understand and comply with, but there must be a scrupulous effort. Companies who do not bother to find expert securities help are probably not good investments.
As most startups fail, let's take a look at why. Probably the largest cause of failure is management. While managers need a living wage so they do not have to worry about their own finances while building their company, managers who pay themselves lavish salaries and perks should be shot. Beware lavish spending of any kind. The watchword for a venture company is frugality. Only the cheapskates will survive the hammer and pound of the business world.
Next, although this could be called incompetent management, having a faulty business model is probably the next most serious cause of failure. Volumes can be written here, but the worst crime in this category is failing to do many customer surveys and make them thorough.
Sadly, the next cause of failure is fraudulent conduct. Some companies are formed only to provide the promoters with funds from the investors. They know the company won't work. The worst of them lie to get the money. No matter how much due diligence you do, you may be up against professional scam artists who make a career of doing this. As this is their career, they are good at it. Or you may be lulled into a feeling of confidence by the stellar reputation of the promoters. It is at this point where the investor must be a suspicious swine. As guilty as he may feel about it, it is his only hope.
The last risk is not that of failure. The risk is that of dilution. The company succeeds but the business is soaking up much more cash than expected and the new stock that is sold dilutes your equity.
As all of us in this industry know, you will spend several times more than you expect and take twice as long as you expect to do anything.
As many venture investors will tell you, the way to really do due diligence is to invest and be inside the company for a year. Only then will an investor see what he has.
I believe that venture companies are our real hope for the future. They will fuel growth and competitiveness. I have a soft spot for the brave entrepreneur who wants to sacrifice his life for his goals. Let's give him the resources he needs to succeed and do it fast. Then, a year or two from now, we can all look back on this as the start of a great deal for all concerned. That is what we all want, isn't it?
Both David Rapp & John Lux are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
David Rapp has sinced written about articles on various topics from Finances, Investments. David Rapp is an expert on obtaining financing from angel investors. He runs a website where entrepreneurs can find resources about raisi. David Rapp's top article generates over 880 views. to your Favourites.
John Lux has sinced written about articles on various topics from Home Management, Debt Consolidation and Venture Capital. For more information on raising money and venture capital, visit my website at or email me at lux.i. John Lux's top article generates over 8100 views. to your Favourites.