Entrepreneurship is getting hotter. With the job market decline, people are starting to look inward for ideas to make money. Stock market returns stink too. Many people with money are looking to increase their return by investing in start ups. However, you need a game plan.
It’s risky to be an angel investor. Fortunately for investors, academics are studying and publishing data. The Kaufman Foundation is a well respected source for entrepreneurship, and they published a study that identified some best practices for angel investors.
Strategies to Enhance Performance
The historical picture of angel group investor outcomes offers lessons in the practice of angel investing. These include:
Due diligence time – Investors experienced better returns in the deals where they exercised more due diligence. Sixty-five percent of the exits with below-average time spent on due diligence reported a return that was less than their original investment. Losses occurred in only 45 percent of the deals where investors did above-average due diligence.
Industry expertise – Analysis indicated that expertise has a material impact on angel investors’ returns. Returns were nearly double for investments in ventures where the investor had related industry expertise.
Participation – After an angel makes an investment, his or her participation in the venture – through mentoring, coaching, and financial monitoring – is significantly related to that venture’s returns, according to the study.
Follow-on investing – Deals where the angel investor made follow-on investments generated significantly lower returns. In ventures where follow-on investments were made, nearly 70 percent of the exits occurred at a loss. The study recommended additional research to determine the impact of other factors in these results.
These are interesting points. Due diligence is the things you do to research the company. The problem with doing extended due diligence is it takes time. The longer you take, the longer the entrepreneur waits for their money. If they have some sales, and are generating some sort of cash flow, it makes the wait less painful. However, if they need it to live, it makes it tough.