The Investing Process for Angel Investors

1. Defining Your Investment Goals

As an angel investor, it is important to have a clear understanding of your investment goals. This will help you make informed investment decisions and avoid making impulsive decisions that could jeopardize your investment portfolio.

Some common goals for angel investors include:

1. Generating a return on investment (ROI);

2. Diversifying their investment portfolio;

3. Supporting entrepreneurs and/or businesses with a social or environmental mission.

Before making any investments, it is important to do your own research and consult with a financial advisor to ensure that your investment goals are aligned with your overall financial goals.

Once you have a clear understanding of your investment goals, you can begin to define your investment strategy. This should include what types of investments you are willing to make, how much risk you are willing to take, and what time horizon you are looking at.

If you are looking for a higher ROI, you may be willing to invest in early-stage companies that are more risky. However, if you are looking to diversify your portfolio or support businesses with a social or environmental mission, you may want to consider investing in more established companies that may have a lower ROI but are less risky.

It is also important to consider your time horizon when defining your investment strategy. If you are investing for the long term, you may be more willing to take on more risk. However, if you are investing for the short term, you may want to focus on less risky investments.

Once you have defined your investment goals and strategy, you can begin to research specific investments. There are a number of online resources that can help you research potential investments, including online forums, websites, and publications.

When researching potential investments, it is important to consider a number of factors, including the company's financial stability, the management team, the industry, and the market opportunity. You should also read reviews and testimonials from other investors before making a final decision.

Once you have found a potential investment that meets your criteria, you will need to complete due diligence before making a final decision. This process includes reviewing financial statements, assessing the management team, and visiting the company's facilities (if possible).

After completing due diligence, you will need to negotiate the terms of your investment. This includes defining the amount of money you are willing to invest, the equity stake you are looking for, and the rights and privileges associated with your investment.

Once the terms of your investment have been negotiated, you will need to sign a legal agreement that outlines the terms of your investment. This agreement will protect your interests and ensure that both parties understand the risks and rewards associated with the investment.

2. Researching Potential Investments

As an angel investor, you are always on the lookout for new investment opportunities. But how do you go about researching potential investments?

There are a few key things you need to look at when researching a potential investment:

The team: Is the team behind the company experienced and passionate about their product or service? Do they have a track record of success?

The market: Is the market for the product or service large and growing? Is there potential for the company to gain a significant market share?

The financials: Does the company have a sound financial strategy? Are their financial projections realistic?

The competitive landscape: Who are the company's main competitors? How does the company's product or service compare to their competitors?

Once you've done your research and you're confident that the company is a good investment, it's time to start negotiating the terms of your investment.

3. Conducting Due Diligence

As an angel investor, you are looking to invest in early-stage companies with high potential for growth. This means that you will be conducting due diligence on a wide range of companies and industries.

The first step in the due diligence process is to identify the company's business model and assess its potential for success. You will need to understand the company's value proposition, its target market, and its competitive landscape. This information will help you determine whether the company is a good fit for your investment portfolio.

Once you have identified a company that you believe has potential, you will need to conduct a thorough financial analysis. You will want to understand the company's financial situation, its historical performance, and its projections for the future. This information will help you determine whether the company is a good investment.

After you have conducted your due diligence and decided that the company is a good investment, you will need to negotiate the terms of your investment. You will need to agree on the amount of your investment, the equity stake you will receive, and the terms of your exit strategy.

Angel investing is a high-risk, high-reward proposition. But, if you are willing to take on the risk, it can be a very rewarding experience. The key to success is to conduct thorough due diligence and to invest in companies that you believe have high potential for success.

4. Valuing the Investment Opportunity

When it comes to valuing an investment opportunity, angel investors typically follow a three-step process. First, they identify the potential market opportunity for the product or service. Second, they estimate the size of that market opportunity. Finally, they determine what percentage of that market they believe the company can capture.

To estimate the market opportunity, angel investors typically use a bottom-up approach. That is, they start by estimating the number of potential customers for the product or service. They then multiply that number by the average amount each customer is likely to spend on the product or service. This gives them an estimate of the total market size.

To estimate the size of the market opportunity, angel investors typically use industry reports, market research studies, and other data sources. They also talk to experts in the industry, such as lawyers, accountants, and consultants.

To determine what percentage of the market they believe the company can capture, angel investors typically look at the company's competitive advantages. These can include things like a unique technology, a strong management team, and a favorable market position.

Once theyve estimated the market opportunity and determined how much of that market they believe the company can capture, angel investors then need to value the company itself. To do this, they typically use a method called discounted cash flow analysis.

In discounted cash flow analysis, angel investors estimate the future cash flows that the company is likely to generate. They then discount those cash flows back to the present to account for the time value of money. This gives them an estimate of the present value of the company.

The final step in the process is to subtract the amount of money that the entrepreneur has already raised from the present value of the company. This gives them the amount of money that they would need to invest in order to own a certain percentage of the company.

Angel investors typically use a variety of methods to value an investment opportunity. But at the end of the day, its important to remember that valuing a company is more art than science. There is no one right way to do it. The key is to use a method that makes sense for the particular company and situation.

5. Negotiating and Structuring the Investment Deal

Congratulations! You've just completed the process of sourcing, evaluating and due diligence for an angel investment and you're ready to move forward with the deal. But before you write that check, it's important to negotiate and structure the investment deal in a way that meets your needs and protects your interests.

The first step in negotiating and structuring the deal is to agree on the terms of the investment. This includes the amount of money you're investing, the ownership stake you're taking in the company, the rights and privileges associated with your investment, and the exit strategy for your investment.

It's important to have a clear understanding of the company's business model, competitive landscape and financial projections before negotiating the terms of the deal. You should also consult with an attorney or other advisor to make sure you understand all of the legal implications of the deal.

Once you've agreed on the terms of the deal, it's time to negotiate the investment contract. This contract should spell out all of the rights, obligations and expectations of both the investor and the company. It should also include provisions for what happens if things don't go as planned.

The investment contract should be reviewed by an attorney before it's signed. Once the contract is signed, it's legally binding on both parties.

The last step in negotiating and structuring the deal is to establish an exit strategy. This is important because it will determine how and when you get your money back if things don't go as planned. There are several different types of exit strategies, so it's important to choose one that makes sense for your particular situation.

The most important thing to remember when negotiating and structuring an angel investment deal is to protect your interests. Be clear about what you want, consult with an advisor to make sure you understand all of the implications of the deal, and don't sign anything until you're comfortable with the terms.

6. Making the Investment

When it comes to making an investment, there are a number of things that angel investors need to take into account. The first is the stage of the company that they are investing in. Early stage companies are typically more risky, but also offer the potential for higher returns. As such, angel investors need to make sure that they are comfortable with the level of risk that they are taking on.

Another important consideration is the amount of money that the angel investor is looking to invest. It is important to remember that not all investments will be successful, and as such, it is important to diversify one's portfolio. This means investing in a number of different companies, in different industries, and at different stages of development. By doing this, an angel investor can minimize the impact of any one investment not working out.

Finally, it is also important to think about what kind of return the angel investor is looking for. This will vary from person to person, but it is important to have a realistic expectation of what kind of return can be achieved. Angel investing is a long-term game, and as such, investors should not expect to see immediate returns. With that said, if an angel investor is patient and picks good companies to invest in, it is possible to make a considerable return on their investment.

7. Monitoring and Managing the Investment

1. Keep track of the company's financials. This includes reviewing their income statement, balance sheet, and cash flow statement on a regular basis.

2. stay up-to-date on the latest industry news and trends. This will help you identify any red flags that may be affecting the company's performance.

3. Meet with the management team regularly. This gives you a chance to ask questions, offer advice, and stay involved in the company's progress.

4. Be patient. Keep in mind that it takes time for a startup to achieve success. Don't expect overnight results.

5. Have an exit strategy. Know when you want to sell your shares and how you plan to do it.

By following these tips, you can be sure that you're doing everything you can to protect your investment and help the company succeed.

8. Exiting the Investment

As an angel investor, you're likely looking to invest in early-stage companies with high growth potential. But what happens when it's time to exit your investment?

There are a few different options for exiting an investment, and the best option for you will depend on your goals and the stage of the company you're invested in.

One option is to sell your shares to another investor in a secondary market transaction. This can be a good option if you're looking to cash out quickly and you're not concerned about getting the highest possible price for your shares.

Another option is to wait for the company to go public through an initial public offering (IPO). This can be a good option if you're patient and you're looking for the highest possible return on your investment.

Finally, you can also hold onto your shares and wait for the company to be acquired by another company. This can be a good option if you're looking for a medium-term return on your investment.

No matter which option you choose, it's important to work with a qualified attorney to ensure that you comply with all applicable laws and regulations.

9. Reviewing and Learning from Your Investments

One of the most important aspects of being a successful angel investor is reviewing and learning from your investments. This process can help you improve your investment strategy and avoid making the same mistakes in the future.

There are a few different ways to approach reviewing your investments. First, you can take a look at how each investment has performed financially. This will give you a good idea of which investments were successful and which were not.

You can also review your investments from a more qualitative standpoint. This means looking at the business itself and evaluating how it is doing. This can help you identify whether or not the business is on track to meet its goals.

Finally, you can also review your investments from a personal standpoint. This means considering how the investment has affected your life. This can help you determine whether or not the investment was worth your time and effort.

Reviewing and learning from your investments is a vital part of being a successful angel investor. By taking the time to do this, you can improve your investment strategy and avoid making the same mistakes in the future.

By working to ensure we live in a society that prioritizes public safety, education, and innovation, entrepreneurship can thrive and create a better world for all of us to live in.

Ron Conway