Angel Investing is the process of finding start-up companies and funding the early stages of their development in exchange for a share in the company and percentage of turnover. Businesses often opt for angel investment as the funds do not appear as a debt on the balance sheet. If the business chose to raise capital with a bank loan then if the company fails they are still liable for the debt.
Angel Investors are normally confused with venture capitalists. An angel investor is a passive investor that will fund an enterprise during the first stages of development. They will provide seed capital to companies who have potential for massive growth. Angel investors are normally wealthy individuals and their contributions are anything up to a $1 million. Venture Capitalists generally take a more proactive view of controlling the project as they often provide significant funding of $5 million or more.
Angel Investors make money by claiming a portion of ongoing turnover and also realize a large lump sum gain when the company is sold or floated.
How Angel Investing play a part in your portfolio
Angel investors can invest in a number of ways; with their own money direct into a start-up company, as part of a pooled fund known as an ‘Angel Group’ or through an Angel Investing Managed Fund.
The target exit time for angel investors is fairly long with a sale of their share coming after at least 5 years. That can seem a long time to tie up amounts around $1million. Angel Investing can be very risky if the correct due diligence is not conducted. As in every kind of investment you should thoroughly research your proposed strategy and make a decision based on the facts. Not on gut feeling or even market sentiment. Markets can change in an instant but solid numbers take time to appreciate or deteriorate.
If you have insufficient funds to directly invest into a business you could join an Angel Group. With a minimum investment of $100,000 you could join an Angel Group and have your funds diversified into a number of start-up projects. This will diversify your investment and you realise a gain that is an aggregate of the group’s total turnover.
If you are not comfortable with having your money tied up for a long period of time then an Angel Investing Managed Fund may be a suitable option. Returns are vastly diluted by fees, failures and by having your investment more liquid.
Angel Investing is definitely worth an investigation as the returns can be very high. The perceived risk of this kind of investment is high but relative to the potential returns, and relative to potential falls that can occur in the stock market, this kind of investment is stable.
About the author:
Murray J. Priestley is the Managing Partner of Portofino Asset Management, a private asset manager and publisher of the Portofino Report, an alternative investment education newsletter. For more information – http://www.PortofinoReport.com/
