Advice For A New Angel Investor From An Experienced Pro

Angel investing is a hot area, and since I’ve been an angel for quite some time, I have lots of friends who ask me how they can become angels as well. In one sense it’s very easy. All you really need is a cheque book, so you can sign cheques for startups, but the reality is far more complicated.

But, if I had to give just one line of advice it would be this – only invest as an angel in companies you fall in love with.

This is the only thing which makes angel investing worthwhile. This way, even if the company crashes and burns, you won’t feel so bad about the loss of your hard earned money, because you had a deeper purpose when you backed the founder.

This might seem counter-intuitive. After all, aren’t angel investors hard-nosed analytical businessmen, who invest their money in a clever entrepreneur so that they will earn outsize returns? Isn’t every angel investor trying to identify the next unicorn so they can become rich quickly?

Takeaways For New Angel Investors

I wish life was that simple, but most startups are going to fail, and this is true no matter how smart you are. Unless you are willing to accept this, I don’t think it’s a good idea to even start angel investing. Because you’re far more likely to get better financial returns in other investment classes, such as micro-caps in the public listed space.

Also, while it’s necessary to fall in love with the founder, this is not sufficient in order to ensure success. There is a steep learning curve involved in doing due diligence properly, so you don’t get carried away by a slick, smooth-talking entrepreneur.

You also need to handhold the founder after pumping in your money, so that he can continue to grow. This may not be your cup of tea because there are lots of ups and downs – not just in the founder’s life, but in the angel investor’s life as well. Because most startups are perilously close to the brink of bankruptcy for the first few years.

If you don’t want to deal with this volatility, then please don’t rush in – even experienced angels fear to go down this path, because they have often been proven to be fools!

This post by Dr. Aniruddha Malpani first appeared on LinkedIn and has been reproduced with permission.

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