ABOUT ANGEL INVESTING
WHAT IS A STARTUP?
The term refers to any new business venture. They are typically in the early stages of their operations, and they need money from external sources to grow. Founders of startup businesses, otherwise known as entrepreneurs, are often willing to sell some ownership in their company in order to raise money to scale up.
WHAT IS AN ANGEL INVESTOR?
Angels invest into startups and get ownership stakes. When these startups eventually mature, angels earn a return on their investment. Most angels aren’t simply investing for a financial return – they are also investing in the stories behind the companies and the experiences they create.
HOW DO ANGELS MAKE A RETURN ON INVESTMENT?
Investors earn returns in a number of ways:
The company gets to the point where it is has scaled-up and is generating surplus cash and can start distributing dividends to shareholders.
The angel sells his/her stake in the company to another investor at a higher valuation than at what he/she had acquired it.
The company is sold. It may be acquired by or merged with another company, or it could list on a public exchange. This is called an exit. The investors are then paid out, ideally at multiple times the money initially invested.
ARE ALL STARTUPS DIGITAL?
No. Startups can cover the full spectrum of enterprise, from conventional brick and mortar businesses to digital innovators.
WHY INVEST IN STARTUPS?
Investing in startups can be hugely profitable. In some cases, startups grow into trailblazers in their respective industries: they become highly valued following a few years of development. Hence, angels who gain stakes in companies during their early growth can make huge returns on their investment if these companies become successful.
Angel investing is also personally rewarding as it gives investors the opportunity to fuel innovation. Angels are typically sources of finance and can also support companies as mentors or ambassadors of the brand. They are in the vanguard of innovation, and this makes angel investing extremely exciting.
HOW IS ANGEL INVESTING DIFFERENT FROM VENTURE CAPITAL?
Startup companies can raise money from angels and venture capital firms. The basic difference is that angels invest directly into startups as individuals. Venture capital firms collect money from many individuals or institutions and charge the investor a fee to allocate that money into the best startups.
ABOUT YOUR INVESTMENT
WHAT’S THE RISK?
Many startups will yield minimal, if any, return on investment. Successful angels will diversify their portfolio, or hold investments in many startups simultaneously, to offset the losses they may incur on some of them. The startups that eventually mature, however, may yield strong returns on the amount invested in them and on the angel’s portfolio as a whole.
HOW IS THE VALUATION OF A COMPANY DETERMINED?
People who invest early have the benefit of acquiring a stake at a valuation that may not reflect the full potential of a company. Startups often raise money in multiple stages, or rounds, as they grow.
You will want to look at key performance metrics of the specific company at the time you make your investment, and compare them to the same metrics for similar companies that have been able to raise money. Ultimately, the valuation will be set between the company and the investors.
HOW IS MY STAKE IN A COMPANY DETERMINED?
Once a company’s valuation has been set for a given round of funding, your ownership is a function of that valuation and the amount of money that the company raises in that round.
Your investment / (Company Valuation+ Total money raised) = Your stake in the company
If the company raises additional money after you invest, your percentage ownership will decrease. Your stake becomes a smaller slice of a bigger pie.
HOW DO YOU CHOOSE THE RIGHT STARTUP?
Angel investing is all about evaluating potential. Angels typically look at three facets of a startup: the market, the product, and the team. Here are some of the questions you may want to ask before making an investment.
Are you convinced that the product solves a problem? Can the product be monetized? Is the product scalable?
Is the team credible and experienced? Is the team passionate, energetic and 100% dedicated to the company? Does the team have the answer to every question you ask?
Is there a market for the product the team is developing? Do you understand the mechanics of the market well? What are the strengths and weaknesses of the product’s competition in the market, and how does it position itself relative to its competition?
WHAT ARE THE MAIN LEGAL TERMS OF THE INVESTMENT?
The subscription or share purchase agreement will contain rights in connection with an investor’s purchase of shares or other securities of the startup, such as representations and warranties to be given by the start-up as to the nature of its business and ability to accept the investment, and other key covenants from the startup.
The subscription/share purchase agreement may also contain conditions precedent to completion of the investment and other requirements to be satisfied by the start-up and/or the investor before completion can take place.
The shareholders agreement will also typically set out matters that require shareholders’ approval at varying levels such as raising additional capital or other material changes to the business.
It should also be noted that an investor’s legal rights may also arise from the corporate and other related laws of the jurisdiction of incorporation of the start-up.