Mehdi Maghsoodnia

Risk in private equity investing is inherent in the process. Often the greater the Risk, as in early stage the company, the great the Reward…if the terms are right. Lots of “ifs” involved in angel investing. You get the greatest return when you invest and the company has a low valuation. But that is often based on not accomplishing many milestones yet. Without the milestones to show a company can execute, the risk is greatest. So what are some key milestones a company should have at the major stages of development?

Start Up or Seed Stage:

1. Has a working business plan that delves into key areas of the business so they know what they do not know and what they will need to get help on. For example: Figuring out the actual cost of goods when manufacturing. Or will they hire sales reps or outsource sales etc.

2. Has protected the product and offering with patents, copyrights, or at the very least explored it and determined trade secrets are best.

3. Fully understand who their target market is and why they want to buy that product or service and what are they willing to pay for it.

4. Have assembled a good advisory board, even if they do not have the funds for a management team. They should be people that have relevant experience.

5. Has been able to raise a “friend and family” founders type round to at least get the $100,000 to $200,000 needed to build the balance sheet, pay for the patents etc, allow the CEO to actually be a full time CEO, and ultimately do the things that validate the business.

Early Stage:

1. Building upon the seed start up stage, as a company enters into Early Stage they should have a finished product and either customers already buying or at least have a serious pipeline of customers they have been courting and will be buying.

2. The money that comes in at this round should get them to cash flow positive.

3. They should be expanding management to include “execs with checks” or at least management that believes enough in the project to share risk through compensation from shares. No Hired Guns.

4. They should have analysis on the exit….do companies such as theirs get bought or go public. Who in their industry has done either? Who has bought companies like theirs. Because if they know what they are going to grow up to be, they can put a plan in place to get there. This is where you get your return, so this is important.

Expansion Stage

Angel Investors really do not play at the expansion stage, and at that point the risk is still greater than a public company borrowing money from a bank, but not near the risk associated with Early Stage or Seed Start up Stage companies.

At just about every stage, you can also mitigate risk though the use of key-man insurance to protect in case something happens to the inventor/founder etc. Also you can mitigate risk in the structure of the deal so that if the company has to go to a fire sale, you can get all or most of your investment back when the company is liquidated.

Angel investing can be very rewarding if the risk is appropriately mitigated.

Written by Karen Rands, President and CEO of Kugarand Holdings LLC; article source

With a turbulent stock market and a real estate market in serious decline, it definitely makes sense to seek out alternative investments. One possibility that many wealthy individuals overlook is making investments in private equity. This simply means investing in a company that is privately held rather than in a public company that offers its stock to the public over a stock exchange. People who make these sorts of investments are sometimes referred to as “angels,” a term that originated in show business, to describe individuals who provided financial backing for theatrical productions. It is now widely used to describe an investment in any business venture, particularly start-up companies. Many of today’s most successful technology companies received their initial capital from wealthy individuals.

An angel investor is sometimes called an accredited investor. That is defined as an individual who has a net worth of at least a million dollars not including the value of their residence.

Angel investing is riskier than investing in public companies because many times the companies seeking capital are early stage enterprises without significant cash flow or earnings, and it is difficult to predict how profitable the company is going to be. A significant number of early stage enterprises fail, so there is a very real possibility in any investment of this type that you will lose all of the capital you invested. The other significant element of risk is liquidity: private equity investments typically must be held until the company is sold or goes public, which could be 2, 3, or 4 years in the future. You can’t simply log onto your investment account and put in a “sell” order as you can with a publicly traded security. The upside potential is extremely attractive, however. It’s not unusual for angel investors to earn a 50% compounded return on their money. And angels also get the satisfaction of watching a small, unknown company become large and successful-and knowing they contributed to its success.

Angel investing is definitely an activity for high net worth individuals. Although the amount of investment in any one deal varies widely, it is quite high, $20,000-$100,000 or more. The average investment in a single company by an angel is $78,000.

How do you get started in angel investing? There are angel investor organizations, called angel networks, in many cities in the US, and not just in traditional centers of venture capital investment such as the San Francisco bay area, or Boston. Joining one of these and attending their monthly meetings is a good way to see how angel investments are made. The investment can be made as a group to spread the risk or on an individual basis, each angel conducting their own due diligence and deciding whether to invest or how much to invest. By becoming part of an angel group, it allows you to network with other angels and learn from their experience.

Written by Brian Hill, the author of Attracting Capital from Angels

For entrepreneurs who are looking for an angel investor to help them with their capitalization needs, one of the most difficult things to do is to actually meet with an angel investor and present his or her business plan. However, there are a number of things that an entrepreneur should bear in mind with regard to angel investors so that he will not have to worry too much about what will happen during the meeting.

Before the meeting

One of the first things that entrepreneurs should bear in mind is that even before an angel investor agrees to meet with him or her, the angel investor probably already has an idea of who he or she is. This is because of the fact that angel investors make it a point to “screen” who they meet with, and, as much as possible, they want to be introduced to entrepreneurs by a trusted friend or relative so that they would have a “reference.” This is because they want to meet with entrepreneurs whom they can have confidence in and trust.

If an angel investor is a family friend or was introduced by a friend or a relative, it would be good to hold a “pre-negotiation meeting” before the big meeting by inviting the investor to gatherings or parties. This is because doing so can allow the entrepreneur and the investor to get to know each other better before the meeting, which can also serve as a good opportunity to make a good first impression.

During the meeting

During the big meeting, an entrepreneur can build on the first impression that he has made by coming to the meeting prepared to effectively present his business concept and to answer any questions that the investor may have. To be able to do so, he or she must prepare a good business plan and bring some very important tools like a calculator, which can help him assess his business needs given the different options he would be presented with during the meeting. In case the investor agrees to invest, it would be a good idea to draw up a letter of intent. However, if the investor is a friend or a close family friend, a simple verbal agreement and a handshake would suffice before the papers are prepared.

To help relieve some of the anxiety that an entrepreneur goes through in looking for an angel investor, there are a number of ways by which he or she can make the meeting with an investor more pleasant. Some of these include holding a “pre-negotiation” meeting and preparing well for the meeting in order to leave a good impression with an investor and increase the chances of signing an investment deal.

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