Angel investing comes with plenty of pitfalls, including how you field, sometimes reject, pitches from friends and family members. The payout can also be incredibly hit-or-miss: Seventy percent of 245 startups tracked in a 2016 study failed to return even the original capital to investors, while most of the investors’ returns came from only 10 percent of exits, according to the Angel Resource Institute.
So if you’re ready to spend your money–and time–on other people’s startups, know the angel basics.
Set your strategy.
Shooting from the hip can be dangerous for new investors, so figure out some personal parameters upfront. Most important: Have a sense of how much money you can stand to lose in aggregate, and how much you’re willing to put into each company.
Involve your network.
You don’t have to go it alone. When Kittredge began thinking about investing, he started asking his contacts about their wins and losses, which made it “much easier to filter through the deals I wanted to take seriously,” he says. Andrew Bokor, an angel investor and co-founder of Truss, an online platform for commercial real estate, says he simplified his vetting process by working with a venture group in Chicago, Hyde Park Angels. “They’d bring deal flow, do initial diligence, and handle the administrative aspects,” says Bokor, allowing him to focus on his funding goals.
Anticipate all outcomes.
Make sure you’re aware of the risks associated with any investment–especially if you’re backing a friend or business associate. “You may have an exit where there’s not enough to pay everybody–and then you really are fighting over crumbs,” says Kane. It’s also worth having a blunt conversation about what a less-than-ideal outcome would mean for the people you’re investing in, particularly personal contacts.
Pick and discuss a role.
Do you want to be an active investor, a silent partner, or something in the middle? “What a lot of people don’t realize is that if you’re a minority investor, once you write the check, you don’t have a lot of leverage unless you are in a control position or have negotiated something contractually, such as a board position,” says Neil Kane, a serial entrepreneur and director of undergraduate entrepreneurship at Michigan State University. Before investing, discuss your ideal role–adviser position, board seat, something else?–with the company’s leadership.