7 tips for your first investment as a business angel

Investing in startups is not a wet finger and you know it. Wondering how much you will invest? Where do you find startups? How do you balance your portfolio? If you don’t know the answers to these questions, don’t worry, you’re not alone. Many investors want to be business angels and invest in startups, but don’t know where to start. Here are seven tips for your first ticket.

Only invest money you can lose

Startup statistics are plentiful. Some say 7 out of 10 startups die early, others grow to 9 out of 10. Others say startups supported by the accelerator are more likely to fail, others say startups with Blue logos have a higher success rate than those with red. in their logo … unless it’s the opposite? This market is in its infancy and it is very difficult to gather reliable statistics. However, I dare to decide that the risk of a startup’s failure is higher than its success. This means for investors that for any new venture they are more likely to lose their investment than make money. Good profits in a portfolio of startups come from some big successes. It can take a long time before these hits happen and they are relatively rare. So, the first piece of advice you should follow: invest only the money you can lose. You should be willing to amortize your investment when you start.

Learn how to use financial instruments designed for start-up investments

There are a range of financial instruments that you will need to learn to use. Convertible bonds or convertible loans have several advantages over ordinary stocks or loans. But be careful! A convertible bond is a loan that accrues interest over time and is eventually converted into equity. The conversion takes place during the “qualifying event”: generally the first major fundraiser. During this conversion, “convertible” investors acquire shares at the price used in this round of investment. Of course, they invested their money earlier and therefore got a pre -agreed percentage reduction on this price. Often there is also a cap on the highest stock price that can be used, in case the stock actually explodes.

If you don’t understand what’s written in the last paragraph, it’s probably a good idea to find out more by going online or finding someone who can explain it to you. If you don’t know what interest, discount, ceiling and qualifying event mean (proving to be go to the market), you may be missing some basics that you will probably need at some point. If you don’t understand the mechanics of seed investing, you can fail. Interest, discount, cap and qualifying event are the basics. Then came the details!

The question that investors often ask is: “What percentage of shares can I possibly receive when converting my convertible bond? » Suppose the investor has invested 100,000 euros and at the time of conversion the valuation of the startup is 1 million euros. It’s fun to think that you get 100,000 divided by 1,000,000 = 10%. However, this is not true. Once convertibles are converted to shares, the startup must first issue new ones! Therefore, the total must be increased to the number of new shares to be created, i.e., 1.1 million. Thus, the total share that the investor will receive will be 100,000/1,100,000 = 9.09%.

After that, new investors will still need to buy shares: their investment is likely to be the qualifying event – the fundraising – that triggered the conversion. These additional actions will reduce your additional percentage. You don’t know how much because it depends on the size of this investment round. If you expect 10%, but you get 9.09% or less, you will fail.

Pay attention to detail

So you contact a startup, you meet the team and they do their presentation in two minutes. Let’s say you’re very excited about the business idea and the team and your instincts are telling you that you need to invest in this startup. It’s time to slow down. Take away your enthusiasm and take a good look at the details.

Some details you should always check:

  • How is capitalization formalized? Are there many small or inactive shareholders? Does the company have debts that it may not be able to pay?
  • Is there a co-founder/shareholder who is no longer active and needs to redeem the shares?
  • Does the company own all associated IP addresses and URLs? If it has IP licenses: are they long enough and covered enough?

You may not have heard some of these terms before and it may sound like witchcraft. You can find an experienced attorney to help you but, again, a change fee can come up at any time. One way to avoid high costs is to look for other business angels who have already faced the same problems. Surround yourself with investment -loving friends you can ask for help. Maybe you can make a habit of investing alongside them. Expanding your network is important! Every company is different and every startup has specific details that you must fully understand.

Stay informed about the day-to-day life of the startups in which you are investing

If you are accustomed to investing in shares of companies sold to the public, you are accustomed to check online the daily stock price and all the latest news. With seed investments, this is not possible. Needs more practical thinking. Startups work hard and every moment spent with investors to let them know is wasting valuable time on their activity. At the same time, the startup must establish a relationship with its investors. You can’t create trust in an instant. So I advise startups to send out weekly newsletters. If they are smart, they will use these newsletters to ask for advice or additional support. If you are a smart investor, you will be willing to provide this support.

Not all startups, however, have communications or finance experts who are capable of delivering good financial and strategic presentations. If they can, I wonder if they shouldn’t devote their time to the business. If you have concrete questions: ask them. As long as you can come up with great ideas and are truly constructive, your emails will be appreciated. In general: Startups are talking a bit differently. It is very important for you as an investor to stay informed.

Be prepared for a lasting relationship

I advise investing in startups only if you think it is exciting and fun. If you want to earn fast, you probably need to reconsider your decision. Start -up investments are long -term. Most startups have a cash flow negative in the first two years, i.e., they lose more than they gain. They burn investments, hoping that one day they can make money and start a profitable business. After that, they can reward their first investors with an exit.

There is always an opportunity to sell your seed investment before the company exits but liquidity is low. There is no active trading platform yet where supply and demand for seed investment positions are offered. Also, if you have parts in a startup, you usually can’t immediately sell them to anyone. It is common for legal entities to be organized in such a way that you must first sell your shares to your fellow investors. I will not go into detail in this article. But again: if this is new to you, find a way to gain more knowledge on this topic.

I also want to point out that the success of your investments does not only depend on choosing good companies. It’s also about what you add to society after investing. You can support the company from your network and personal experience. So, after investing, don’t be too passive. A startup is about having a mindset that is focused on discovering and exploiting opportunities. As a startup investor, you can do the same. If you come across a potential supplier or potential customer, indicate that you know a startup that might be interested in them. Being an investor really means being an ambassador.

Diversify your portfolio

Don’t put all your eggs in one basket. I often see investors making small amounts in 5-10 companies. For any company, the risk of failure is relatively high, regardless of its quality. By having a larger wallet, you can avoid the “all or nothing” part. Of course, don’t invest in too many startups, you need to keep track of their news. When you start with your first portfolio of investments, you can choose to invest 1000 euros in 5 to 10 different startups. This way you can gain more experience and see if you are making a profit from it, without exposing a large amount of capital. Once your confidence increases, you can invest more in your favorite companies.

Seek advice and get business angel training

Seed investing is a skill you will learn. Always take care to learn more and try to educate yourself. Whatever the topic, you’re likely to find an expert who knows more than you do. You may have friends who have already invested, there are also places that offer angel investing training. If you have more identifiable business angels, you can share your potential investment opportunities, learn from how others see things, and eventually decide to invest as a syndicate.

In reading what I have written, I sincerely hope that I have not intimidated any (potential) investor. It is important for an investor to be aware of the mechanisms and risks inherent in seed investments and that the rewards do not always translate into a financial return. Investing in startups can be rewarding because of your direct connection to it. You can really learn a lot from a startup, make a direct impact, and see your investment grow. Don’t underestimate the intricacies of start-up investments, either. Even if you have a startup, investing in others is very different. Even if you are a financial investment professional and know everything about stocks, bonds, investing in startups is very different. Make your first (small) investment and see what happens. Maybe not for you. The only way to know is to do it.

This article was originally published on Moderate in English by Leapfunder.

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