WBAF Chairman, Baybars Altuntas, shares his six fundamental principles of Angel Investing to help guide you to investment success.
Chairman of WBAF
Governments around the world agree that Angel Investment is an important factor in boosting economies; and as a result many have incentivised this kind of investment. In 2017, G20 leaders announced a focus on Angel investment as a necessary measure to stabilise economies, and pointed out that there is still a shortage of investors. If you are considering making the transition to Angel investing, experienced investor and chairman of the World Business Angel Investment Forum, Baybars Altuntaş, offers his six key principles.
1 UNDERSTAND WHAT AND WHO YOU ARE INVESTING IN
There is much more to the investment evaluation process than a quick binary choice of ‘yes’ or ‘no’; and there are several approaches to considering teams that have been tried and tested in real-life business situations by experienced investors. Investors should consider the proposal from different angles. How much importance does the entrepreneur place on the investor’s background and character? How much due diligence should go into evaluating the startup’s team? Should third-party corroboration be sought, and how much?
2 UNDERSTAND THE DIFFERENCE BETWEEN STARTUPS AND SCALE-UPS
Statistics from the OECD reveal that a mere 1.2% of startup businesses manage to attain Angel Investment; and that only one in ten scale-up projects that gain investment actually make a successful business out of it. So what can prospective investors take away from these facts to apply in their own careers? Would it be wiser to invest small amounts and deal only with startups that achieve lower success rates, or to take the risk of putting up more money for scale-ups which have higher chances of success? It can often be a case of deciding on investing less with more attached risk, or investing more with less attached risk.
3 KNOW WHAT YOU BRING TO THE TABLE
The fact that Angels often consider themselves ‘value-added investors’ means that they frequently find being involved in getting a new business off the ground just as satisfying as they find helping it financially. A significant portion of Angel Investors are previous business owners themselves, and have a good understanding of what goes into making a company work. Angels add value in several ways, often including industry experience, entrepreneurial knowhow, creative thinking, mentoring, and industry contacts. When entrepreneurs value investors for more than the finances they bring to the table, they enable Angel Investors to support their business in more meaningful and impactful ways.
4 DON’T UNDERESTIMATE THE VALUE OF MENTORING
Recognise that a significant part of the job that an investor does for entrepreneurs is mentoring. That said, it is common for investors to neglect seeking their own mentor, a shortfall that should be avoided. Having a thorough understanding of the principles of investment, and how exactly they are relevant to businesses of different kinds and ages, is crucial for a strong investment partnership. Becoming familiar with the experiences of investors who aren’t new to the game is a great way of honing this understanding. Placing an experienced investor at the top of a mentorship chain that Angel Investment inevitably involves is a wise move for newcomers.
“Investing in the right
startups – that’s how
you win. It is so much
more important than
5 BE AWARE OF EXIT EXPECTATIONS
Many startups expect the involvement of an Angel Investor to speed up the exit process, but the impact of an investor on exit – and exits in general – tend to be misunderstood. Much emphasis is placed on the formation and growth of business relationships, and often business exit strategies are aimed at those approaching retirement. Awareness and training on exit transactions for venture capitalists (VCs) has become more common in recent times, which is well worthwhile, as the majority of venture capital agreements give VCs full discretion over the outcome – if any – received by shareholders. However, exit strategies have transformed significantly in recent times. More companies than ever are being sold without ever having received investment from an Angel, and this is happening sooner in a company’s lifetime than it used to. Many modern exit transactions are worth less than $30 million, and these usually take place a mere two or three years after the businesses startup.
6 SEE THE BIGGER PICTURE
A former CEO who went on to be an experienced Angel Investor explained: “It turns out to be much easier than I expected, and also more interesting. The part I thought would be hard, the mechanics of investing, really isn’t. You give a startup money and they give you stock. But it really doesn’t matter, don’t spend much time worrying about the details of deal terms, especially when you first start Angel Investing. That’s not how you win at this game. When you hear people talking about a successful Angel Investor, they’re not saying, ‘He got a 4x liquidation preference’. They’re saying, ‘He invested in Google’. That’s how you win – by investing in the right startups. That is so much more important than anything else.”