An angel investor (also known as a business angel, informal investor, angel funder, private investor, or seed investor) is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. Investing requires a lot of knowledge and power. It requires a lot of information, courage and data before its execution. Here are 5 Angel investing lessons:
1. If you can’t decide, the answer is no
If you can’t decide on an investment, the answer is no. For practical purposes, there are an infinite number of investments out there, so pass. That doesn’t mean you won’t regret it. But the next investment is just as good a priority. Also, your experience and judgement is only going to get better by the time you see the next deal.
2. Investing takes years to learn, and longer to see returns
Get started with angel investing now. It takes years to learn and longer to see returns. You want to invest in 5 companies at a minimum–that takes time. You will start with small investments because your later ones will get better as you gain expertise and brand. That means your returns will take even longer. It takes a long time to learn, but investing is one of the few professions where you can improve until the day you die.
3. Some of the best investors have no opinions
Some of the best investors on the planet have no strong opinions about a particular business. They try not to project into the future, so they can listen intently in the present. Almost any entrepreneur will be smarter in their market than an investor. The investor’s job is to listen and have intuition about whether the founders are smart, honest, and hard-working. These investors don’t fall in love with the business. When it comes time to do a new round, they re-evaluate the business from scratch and ignore sunk costs.
If you’re thinking about all the great things you could do if you were running the business, you’re going down the wrong path. You’re not running the business. If you are telling the entrepreneur what to do, don’t invest. Thinking like an investor is different than thinking like an entrepreneur who is determined to make a business work.
4. Incentives make for bad advice
Incentives influence the advice you get from VCs, lawyers, incubators, and us. Everyone serves their own interests first. The best source for angel investing advice is other angels and founders. People are generally well-meaning but, It is difficult to get a someone to understand something, when his salary depends upon his not understanding it.
5. Power beats contracts
Contracts can be renegotiated. You will be pressured to renegotiate your investment if you don’t understand power. Contracts are written for worst-case scenarios, so people can’t outright steal your money. You’re not going to sue someone over a contract because suing people is bad for your deal flow. Real-world decisions are usually based on power.
If you’re alone, you don’t have the power to fight back. The startup and their new investors can pressure you to renegotiate. So don’t be a herd animal when making an investment decision, but move with a pack when you do.
