What you need to know about becoming an Angel Investor
Many business owners think about angel investing after they exit their business. Here we explore what it is, why so many former business owners become angel investors, and what you should consider before making the leap.
What is angel investing?
An angel investor is an informal venture capitalist looking to provide support or investment in a start-up or early-stage in developing a company. The angel investor will often have a background in the same industry as the business they are supporting and/or technical experience to offer the owners and team. An angel investor will be looking to support a business for the medium to long term, with long term returns in mind, including ownership equity in the business. Involvement could be a one-time investment or ongoing financial support. It is important to note that the capital value of, and income from, any investment may go down as well as up and you may not get back the full amount invested.
Business angel investing is an opportunity to use your own financial capacity and knowledge to support a growing business. Many angel investors are looking to utilise 10 per cent of their surplus wealth capacity to support entrepreneurs. But it isn’t just about the money. As Jenny Tooth, Executive Chair of the UK Business Angel Association explains “it's the business experience, knowledge and skills that you bring and that you've accumulated through your own time whilst building and growing and successfully exiting your business”.
What are the personal benefits in becoming an angel investor?
Angel investing can help provide a new focus after you have exited your own business. Mark Turner, Managing Partner at GatenbySanderson, Executive Branch, said “People find it very difficult when there's a hard stop after they've gone through a business transaction. Suddenly there is a gap in their life where they have been running at full pace. The planning that can go into thinking about how you can avoid the hard stop is really worthwhile doing.”
Previous business owners are attracted to angel investing as an opportunity to manage their own money making their own decisions. “It's not like putting your money into a fund and leaving it” Tooth says. “This is about following your own passions and interests, as well giving time. You are taking shares, it is equity, so you are having some ownership in those businesses. But what is very different probably from your previous business life, whether you were a founder or a co-founder of your business, is that you are only taking a relatively small fraction of shares in that business. The business itself is there to run and grow under its own steam, but with your guidance alongside your equity. That's what really makes the difference to that early nurturing and support to small businesses.”
Tooth notes that it is important to take your time and understand your own focus for angel investing opportunities. “Gently enter into the world of business angel investing by joining a business angel network or group. Start to look at pitches and presentations and get a feel for the type of business that you might be interested in supporting. And it's very helpful just to get that early insight without committing any investment at all at that stage.”
What to consider before becoming an angel investor?
It is worth considering the other side of the coin though when it comes to investing in early startups. Tooth notes “It is worth bearing in mind this is the sharp end, so it can sound quite risky as well.” It is fundamental that you don't invest on your own. “Remember you are going to commit your own money to this and so understanding the risks, the process, the legalities around it, but also learning from others about how to identify what could be an interesting business for you to back and one that you think might have growth potential or opportunity.”
In Asia, many successful business owners have also become angel investors after they retire or exit their businesses. There are good reasons why angel investing is popular among them, according to Irene Chen, Global Head of UHNW Solutions Group at HSBC Private Bank. “In Asia, you have above world-average economic growth, huge populations, young demographics, cheaper costs, generally efficient infrastructure and systems, etc. All these provide a great backdrop for entrepreneurs to start their own companies. This means that there is an abundant supply of interesting angel investment opportunities for people with the right experience and capital. In this region, many successful business owners have built their businesses from scratch 20-40 years ago, so they are intimately familiar with what start-up founders need or face, and can therefore share their own experiences or provide start-up counselling, in addition to providing the capital.
“In HSBC, we are well-connected on both sides – angel investors and start-up founders – and can provide them with the advice and support when needed”, says Chen. To find out more, contact us today