The financial education I received recommended saving what I could and investing with the lowest possible risk. As I started making my money, I studied more on the topic and rehearsed small rebel steps, such as taking it out of savings and investing in fixed income. I'll never forget that day. I was so afraid of my dad saying: “I told you, never play with money!"
Many years have passed and today, after mistakes, successes and a lot of learning – about investments and also about my investor behaviour – I have a very diverse portfolio, with specific purposes for each type of investment. All of them solely for financial purposes. Except one.
I invest in startups as an angel investor. A type of investment that is not justified if it is only to make money.
I like to say that an angel investor is someone who puts part of the pocket, mind and heart in someone else's business, hoping to have some kind of return in these three dimensions.
This matter started interesting me since I was an entrepreneur. A few years ago, I left a successful corporate career to start-up a company. As a former executive and then entrepreneur I continually thought about our financing strategy, that is, where would the money come from to invest in the company?
Throughout this experience and then, as a mentor and investor, I had the chance to know more about the most common ways of startup funding. They're not the only ones, not exclusive and can change over time, depending on the stage of the startup.
(1) Own resources:
the partners invest their own money to start the business and, from a certain moment, the company funds itself with its own results. It's usually called bootstrapping. Financing is limited by the financial capacity of the partners and the company's ability to generate results quickly, that is, reaching the breakeven and starting to generate enough profit to allow reinvestment.
(2) Angel investment:
usually a person who knows the business or market in which the start-up operates. Often a (former)executive of that sector, a person who has contacts and can open doors and has an interest in investing his/her own money. The angel then brings capital, experience and connections, the type of investment we call smart money, to differentiate from an investor who puts only money.
(3) Venture capital funds:
they invest money from other people and therefore can invest more money in the start-up. Few of them work in the early-stage because it is more difficult to invest other people's money in such a high risk phase. Generally the relationship is between founders and fund manager and not direct with investors.
Based on my experience and my friends', I realised that start-ups were trying to survive with their own resources – which may not work for all types of startups – or were trying to invest with VCs (Venture Capitals). And that meant a lot of time invested, little knowledge of how the VCs worked and many deals not closed. A very frustrating process for those who need to use their time efficiently.
Angel investment at the time was a matter of luck. You needed to be lucky to meet someone in the area, who was interested in the start-up, who had capital to invest, who would take that level of risk and had possibility and availability to help. Really a lot of luck needed!
When I started mentoring startups individually or in acceleration programs, I met a lot of interesting people with amazing business or ideas who needed help. I realised I could help more and commit more to the company. My investments were already very diversified, with a portion of my portfolio allocated in high-risk assets. So, this issue of mindset for risk wasn't a problem.
"I was willing to invest in start-ups, but also I had many questions about how to start, how to make it happen?"
Many were the questions in my head: how to identify a start-up that I believe in and that could benefit from my experience, networking and investment? How to evaluate? How much to invest? What are the contractual instruments for an angel investment? How to follow up on the business after the investment?
After many conversations I identified some possibilities to invest as an angel:
1. Individually in one opportunity:
a (former) entrepreneur or executive knows a start-up that needs investment. They talk, come to an agreement and celebrate the deal (procedures and details of the business). In this case, from the decision to invest to the investment contract and then, the monitoring of the start-up and evaluation on the performance of the business, everything is done by the angel investor, alone.
2. Collectively in one opportunity:
a group of angel investors collectively evaluates some start-ups and those who are interested in a specific opportunity form a smaller group that negotiates with the start-up and divides investment among members. This group then organizes itself to evaluate, negotiate and then follow up and support the startup.
Here the risk is diluted with other angels, but only at that opportunity. If for example, an angel wants to diversify her investments, she/he can compose one group with three others to invest in a startup and with eight others to invest in another. But then she/he will have to manage these interactions.
3. Collectively in portfolio:
a group of investors decides to add up their capital potential and invest in a portfolio of start-ups. They evaluate and decide on investments together. Each approved startup is invested by the society and not by a few angels. All stages, from startup screening to investment contracts, and then monitoring start-ups, negotiation of follow-ons and exits are done by the group.
Today I invest collectively in portfolios. In addition to the double dilution of risk, there is another reason that was decisive.
We are a community: we exchange, learn, teach, share information, make virtual or face-to-face events to talk about business, but also about life.
Entrepreneurs who want quality money to fund their start-ups. Angels who want financial return, contributing to innovation ecosystems. Using their intellectual, social and professional capital and learning from the protagonists, entrepreneurs.
(*) Originally published in https://blogcintiamano.wixsite.com/cintiamano
Cintia Mano is an angel investor in REDangels and COREangels Atlantic, and also an entrepreneur, mentor and speaker.
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