Interest in Angel investing seems to be at an all time peak. Investors and entrepreneurs are looking at this topic more seriously than ever and while there are several upsides to it, there are several downsides to it that many don’t consider or know of, especially if they are new to the field. A few of the most misconceptions and pitfalls of Angel investing are as follows.
Like any marriage, Angel investing needs two to tango. The entrepreneur and the investor need to be on the same page about what they are bringing to the table. Investors need to make it clear whether they are bringing just money or money along with contacts, know-how and time. Similarly, entrepreneurs need to make what they are offering abundantly clear. Are they offering the rights to proprietary technology or are they looking for a business partner in a retail model.
Appetite for risk
How much risk can you take on? The amount of risk anyone is willing to stomach is all a very personal matter. Someone might not be worried by a 50% drop in stock portfolio while someone else might not want their money being frittered away. Whatever it is, it needs to be made clear right from the very start.
Does the entrepreneur want someone who is hands-off or hands-on? If the Angel investor is looking to be involved heavily in decision-making and the entrepreneur wants decision-making powers for himself, things can get very ugly very fast. You need to ask the right questions about leadership and management styles right from the very beginning or there could be a lot of trouble down the line.
By exit strategies, I refer to the presence of an exit strategy or the lack thereof. When should one start exit planning? Perhaps the best answer is to simply say “right from the beginning”. A precise and open-ended exit strategy needs to be kept on hand and it needs to be constantly updated. Every contingency must be planned for. For instance, if the entrepreneur wants to have a long-term business and the entrepreneur wants no more than 3 to 5 years worth of investment after which he will liquify his holdings, that needs to be sorted out and agreed upon.
Interest in Angel investing seems to be at an all time peak and investors and entrepreneurs are looking at this topic more seriously than ever.