At JumpStart, we interact with angel investors daily who seek to co-invest in the companies we fund — from individual investors focused on a single company, to organized investing networks like the North Coast Angel Fund with large portfolios.
In the last few years, there seems to be a growing number of individuals in our region interested in angel investing.
Here are a few important questions to ask before jumping into the mix:
1. What are your goals?
Building wealth through angel investing isn’t easy, so angels that are driven by a cause, as well as cash, have more than one way to find success. Clearly defining your personal goals will help inform your strategy and tactics as an investor.
Maybe you are interested in supporting companies that are revitalizing neighborhoods you care about. Or, maybe you just want to help an entrepreneur who reminds you of yourself when you were just starting out. Defining what success looks like for you will help focus your investing approach.
2. How much money are you willing to risk?
Any way you cut it, deploying capital into young companies is an inherently risky proposition. There are ways to mitigate investor risk through deal terms or by spreading more modest investments across multiple companies. But any tactic that lessens risk also tends to reduce the upside potential for returns.
No one sets out to fail. However, the amount you invest should be no greater than the amount you are willing to lose. Investment opportunities come in all sizes — from a few thousand dollars in seed money to seven figures — so even if you want to get started with smaller check sizes, you can still find opportunities where your money makes a difference.
3. What is your level of patience?
Even for the most successful companies, it takes years to deliver returns for investors, and the road to success can be bumpy and unpredictable. That means the companies you fund will likely come back multiple times to ask you for more capital when things don’t go as planned.
Often, not participating in those additional funding rounds means the value of your initial investment drops, so deciding whether to stay on the sidelines or put in more cash is rarely easy. That’s why it’s so important to think about your goals and risk tolerance BEFORE getting started — because once you’re in a deal, you’re in.
4. Are you an active or passive investor?
Angels that are uniquely qualified to provide strategic connections and/or startup operating advice can bring value beyond their money. Are you one of the largest investors in the round? If so, it may be reasonable to request a seat on the company’s board. But even then, it’s important to be objective. Unless you truly can add value by providing assistance, you should probably expect your involvement with operations to be limited.
Remember, entrepreneurship is a team sport. Even as an individual angel investor, you don’t have to go it alone. ●
Jerry Frantz is senior managing partner, entrepreneurial services and investing, JumpStart Inc.