Angel Investing: The Gust Guide to Making Money and Having Fun Investing in Startups

The math leads to a clear and definitive lesson for the angel investor: Investing in companies with reasonable initial valuations (typically in very low, single-digit millions) is a good way to increase your chance of achieving strong returns on your entire angel portfolio. Conversely, investing in companies at high valuations, regardless of how at

Businesses designed for sale at a later, sharp valuation increase will be purchased with an eye to their future growth and profitability, rather than their current earnings, or even revenues. They should thus be willing to take bigger risks, accept outside equity and debt capital, and swing for the fences, focusing on growth above all.

whom I have met through New York Angels, the group I founded more than 10 years ago that is currently the most active angel organization in the United States. These angels aren't high-profile entrepreneurs or business rock stars. They are financial professionals, lawyers, real estate developers, art collectors, retired corporate executives and, yes

It does happen, though, and some early-stage investors are very good at structuring things this way. For example, the investors in India's Mumbai Angels have managed this on more than one occasion. And there have been a few cases in New York Angels' portfolio where later-stage investors wanted to clean up the company's cap table, and therefore made

At the first meeting, for which you should expect to allocate about an hour, the entrepreneur will typically pitch his or her company. There are several ways the entrepreneur may choose to do this, including jumping right into a demonstration of the product or service or simply talking conversationally. However, the most typical approach is for the

Several studies and mathematical simulations have shown that it takes investing the same amount of money consistently in at least 20 to 25 companies before your returns begin to approach the typical return of over 20 percent for professional, active angel investors. This means the greater the number of companies into which an angel invests, the gre

This means that in order to be a successful angel (and, more important, to enjoy being an angel), it is imperative that you have the following personal characteristics: Long-term view (measured in years, if not decades) Strong economic base and the ability to tolerate losses High tolerance for risk High tolerance for failure Even temperament Strong

You can now see that how much money you make from your angel investing is determined by four simple numbers: The value of the company when you invest. The value of the company when you sell. The number of years between those two events, which, taken together, give you your rate of return. The rate of return, multiplied by the amount of money you in

As you can see, VCs and angels have a lot in common. So how exactly do they differ? The chief difference, of course, is that angel investors are investing their own money, while venture capitalists are professional investment managers who invest other people's money.