Long-term investment plans require diversification and the patience to hold until you make a large enough margin on your initial investments to live financially free. Some prefer more tangible investments like housing properties, others invest in stable businesses such as profitable oil companies, and we also have a group of active day traders and long-term index fund investors. And, without a doubt, there exist a variety of financial instruments and strategies you can implement to guarantee financial stability for the future.
However, one investment strategy that is either swept under the rug or given a bad and misunderstood reputation is angel investing, the process of providing capital to business startups for a share in owner’s equity and the opportunity of its market value skyrocketing. And today, we’ll be going over the pros and cons of angel investing and if it’s suited to your investment plan or something you might want to avoid in the meantime.
#1 You Only Need One Good Investment
Unlike investing in stocks, accumulating a diverse portfolio, and adding a slice of index funds that will accrue value slowly over time, angel investing needs one business startup to do really well to make a massive return on your investment. Furthermore, you will need to hold your stocks for the long-term and live off the dividends, whereas selling your share in equity will net you a lump sum of cash that you can comfortably live off of for the rest of your life. And, on the off-chance that you angel invest among the business startups that turn into billion-dollar companies within the decade, the money you make through angel investing is unmatched.
#2 Anybody Can Become An Angel Investor
While both long-term investing strategies and angel investing strategies require capital to start, the entry requirements for angel investors aren’t as high when comparing the ratio to how much you can potentially earn. Whereas investing in index funds will require you to dollar cost average for over the years, angel investors, in comparison, invest in studying business startups and leverage through rigorous business research. As a result, your $5,000 can go much farther with angel investing than it can in your typical stocks and bonds investment plan.
What Do I Need To Be An Angel Investor?
Now that we’ve established the benefits of angel investing, let’s go over some of the necessary requirements and processes you’ll need to master if you want to become a successful angel investor. Remember, much like any other investment strategy, angel investing still requires you to put in the work and see it to the end, so don’t go into it expecting an easy way out of the rat race.
- Money And Time: As we’ve mentioned before, you’re going to need the money and capital to invest in business startups because you’re not going anywhere far without a sum of cash you can afford to risk and lose if things go south. Furthermore, there’s no simple button that will gauge a startup’s potential, that’s up to you to decide, and it will need some time to do your due research.
- Putting In The Effort: If you plan to become an angel investor, understand that it will take a lot of effort to go through multiple business startups, especially if you’re in Silicon Valley where something new and on-trend can boom in a matter of weeks. This isn’t a passive way of making a huge return because your goal is finding the diamond in the rough.
However, There Are Risks
Of course, given the potential return of investment, you should expect there to be inherent risks when it comes to angel investing. And, unlike your typical investment plans that have a generally reliable and steady return, angel investing doesn’t offer the same luxury because you’re dealing with a business startup’s uncertainty.
#1 You Won’t Hit Homerun On The First Try
While those hidden gems do exist, and there are multiple success stories of angel investors getting in at the exact time before the boom in valuation, don’t expect to hit a home run on the first try. In your first 50 companies, it’s more likely that the first 30 will flop, the other 15 do fine, and the last five will net you a back-to-breakeven or in a small loss.
#2 A Keen Eye And Gut Feeling Take Time To Develop
Angel investing is a skill that takes an incredible amount of time to develop and hone. Nobody comes out of a business degree knowing all the secrets, and even the most-experienced veterans still suffer blunders now and then. So, if you’re not willing to train a keen eye and go with your gut feeling, then angel investing might not be for you.
#3 Not For The Faint Of Heart
Last but not least, investing in business startups is risky, and you can invest in over a hundred companies in a single year without seeing any return or only a small amount from your initial angel investments come back. This is the reason why you should only invest what you can afford to lose so that it doesn’t mess with your head and worsen your decision-making skills.
Invest At Your Risk Apettite
Overall, while angel investing strategies do work, we strongly recommend everyone to invest at your risk appetite. If you’re willing to take the opportunity and potentially breaking even with 5% of your net worth for months doesn’t scare you, then we think you’ll have a much better chance at fairing well. But, if you think otherwise, then there’s nothing wrong with sticking with the fundamentals.