Invergarry Partners

Angel, Educate Thyself

May 16th, 2010

Would you be surprised to know that about 5% of Americans are qualified to make investments in small companies that are just starting up?  In order to qualify as an “accredited investor” under the rules of the SEC, you must either have $1 million in liquid assets or make at least $200,000 per year.

Would you be surprised to know that only about 5% of these accredited investors actually make an investment in a private company?  This means that an incredible amount of capital is waiting to be invested in small companies, the very engine of our economy.  The people who make these investments have come to be known as angel investors.  The term started with people who invested in Broadway shows.

Would you be surprised to learn that only 5% of the accredited investors who have made at least one investment in a start up company belong to an active angel investor network or fund?  This implies that the other 95% of investors rely on their own business acumen, the advice of friends and relatives, or their intuition.

If you are someone who is curious about making an angel investment in a brand-new or relatively new business, congratulations!  You have a wealth of information available to you.  Go to the website for the Angel Capital Association to learn about their resources.  This is most relevant if you want to learn to make investments in companies that are based on intellectual property.  An idea that can be patented is often interesting to angel investors because it has the potential to serve a large market, either in the US or around the globe.  The bigger the market, the more someone will pay to acquire that company that you invested in when it was just a gleam in the founder’s eye.

Even if you don’t know anyone who is starting a company based around intellectual property, you may want to learn about how these investments are made as a way to become a smarter investor in businesses that are not.  You’ll learn lessons about deal terms, valuation of companies and evaluation of markets, products, management and boards that will serve you well as an investor.

The ACA was started by the Ewing Kaufmann Foundation in Kansas City.  It has an affiliate organization called the Angel Capital Education Foundation (the ACEF.)  The ACEF website has a wealth of opportunities for you to begin to learn about how to invest.

Angel investing is not for the faint of heart or short of cash.  Most angel investors learn their first valuable lessons by making ill-advised investments in companies that fail for reasons that become all too obvious in retrospect.  Angel investors reduce their risk by sharing due diligence material and discussions with other angels who are considering the same investment as they are.  Though an investment alongside other angels does not guarantee success, it greatly increases the chances of it.

I recently attended the Angel Capital Association’s annual Summit in San Francisco.  It was three days of drinking information from a fire hose.  It reinforced some of what I’d learned as an angel investor and made me realize how much I have left to learn.

Angel, educate thyself, then go forward and invest in a company with an idea that is irresistible and is being started or run by someone who has had prior success in doing so.  You can help spur the local and national economy by creating jobs for people and wealth for owners.  Some of that wealth may find its way back into your community in the form of charitable giving and seed capital for the next great start up company.  You will have a great adventure along the way!

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