Angel investing is a recent phenomenon that began in the 1980’s whereby investors with funds, and often business experience, can support the growth and direction of a new business or start-up by offering financial support and business management advice. These ‘angels’ tend to provide guidance in terms of decision making, and depending on their investment, may have an active role in the businesses in which they invest.
Just hearing about angel investing?
Traditionally ma and pa investors chose property, shares and term deposits. But with the GFC, share market crashes, and property price fluctuations, they’re now looking at other options that have a lower entry point and moderate risk profile.
Thanks to the growth of the internet it has become easier for angel investors and start-up businesses to find each other. This awareness has made angel investing a viable investment option for normal Australians who are looking to increase their wealth, mitigate their risk, use their experience and initiative, understand their investments, and generally keep their toe in the water (in the case of retirees). Because angel investment groups pool together the investment, they share the risk.
There’s now many Angels groups throughout Australia that anyone can join (provided they meet the group’s investment criteria). It can be an exciting prospect having a share in a new business.
There are several hundred groups that exist worldwide. These investors are a key factor in the success of the start-up industry, with many inviting start-ups to pitch their business and find investors.
Although individual investments make it difficult to get a handle on the size of the market, the amount of money invested by angel investors is believed to have doubled in the last five years. The US angel investing market is expected to exceed $25 billion in new investment each year.
What’s an angel investor looking for?
For many it’s about getting in on the ground floor of new companies that can offer above average returns. Much like venture capital, but on a smaller scale, most investors are prepared to accept greater risk than a normal investment due to the potential to earn higher rewards.
Some enjoy the opportunity to share their expertise with young entrepreneurs starting out. Many want a share of ownership, while others seek a lower risk of return from bonds or other financing vehicles. Investors are looking for businesses with a strategic business and marketing plan, who have a viable, unique product or service offering, supported by a strong, dedicated team. Investments can sit between from tens of thousands, to millions. It all depends on the predicted scale and delivery of financial benefits.
How do you become an angel investor?
The best place to start is either with a search on the internet, or discussions with financial industry professionals who should be aware of what local groups exist (and may even be a member of themselves). Then it’s a matter of getting in touch with the group to understand who they are, what they invest in, and their objectives. Most groups will allow you to attend one of their meetings to understand how it works, and what the profile is of the other members.
The Australian government has just introduced new equity crowdfunding legislation, which means you can become an angel investor for as little as $10,000. The new laws specify a cooling off period after the investment is made, providing peace of mind for those who are involved.
How do you find angel investors?
If you’re launching a new product or service, a good way to seek funding is to list on crowdfunding websites. Here you can seek finance before going ahead with your business model. This can be especially valuable where minimum capital levels must be raised for product inventions or development. If insufficient money is raised to reach a specified target, the venture is ended, and the money returned to investors.
Crowdfunding websites such as Venturecrowd and Equitise have benefitted from recent legislation changes that have allowed their investor/business matching platforms to seek funding from ma and pa investors. Before they could only rely on sophisticated investors with a minimum level of $2.5 million in assets, but this threshold has now been reduced.
Angel investing – is it for you?
Angel investing and equity crowdfunding offer a win-win for both parties. New ventures are given a wider choice of funding options, often providing them with funding when none was previously available. It’s not just start ups that will benefit. Existing unlisted companies with turnover up to $25 million can seek investors as well, raising up to $5 million per year through this type of platform.
Investors get the chance to get in on the ground floor of investments that were previously unreachable for them.
For both parties, the middle man is removed, or his stake is severely minimised, leaving a better return on the table for all involved. Crowdfunding and angel investing are only in their infancy, but the future seems bright.
If you’re interested in angel investing – or exploring investment options that work with your objectives and circumstances – you don’t need to do it alone. A financial adviser (or planner) spends their days identifying and presenting opportunities to their clients. Our simple, quick, free service will connect you to the best financial advisers, based on your needs. Click here to get started.
The information in this article is general in nature and does not take into consideration your personal situation or circumstances. You should consider whether the information contained in this article is suitable to your needs and where appropriate, seek professional advice from a financial adviser or other finance professional.