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Angel Investment Opportunities: Risks & Rewards
To say there are many angel investment opportunities available is an understatement.
In 2019 alone, the Small Business Administration estimates that 275,000 angel investors funded 30,000 startup investment opportunities. And it's easy to see why.
Angel investing returns can be impressive.
Ram Shriram invested between $100,000 and $200,000 in a search engine company called Google in 1998. That investment grew to as much as $1.3 billion.
Of course, not all angel investment opportunities will make you a billionaire. However, with a little investing savvy, there are certainly ways to turn a profit.
That's what makes startup investment opportunities so exciting.
In this article, we'll walk you through the pros and cons of angel investors. By the end, you'll have a better understanding of angel investing's risks and rewards.
Let's start with the benefits of angel investing.
The Rewards of Angel Investment Opportunities
There's definitely an element of risk in putting your money into startup investment opportunities, but there's also the potential for splendid returns.
Angel investing returns can be highly profitable.
Just look at Google. The company raised $25 million in angel investments in 1999. That investment was worth about $500 million when Google launched its initial public offering in 2004.
Of course, not every startup turns into Google. But investors reap the rewards when angel investment opportunities do turn into successes.
Financial returns are just one significant reward for angel investors.
Another reason angel investors put money into startup investment opportunities is to support a cause close to their heart.
Maybe an investor wants to fund companies working to solve an issue important to them. And some investors are passionate about nurturing women and minority entrepreneurs.
Another angel investing reward is getting to do exciting work and learn new skills.
That's because many startups want more than money from an investor. These companies seek mentorship and guidance, allowing investors to play an active role in their investment's journey toward profitability.
Creating jobs is another benefit to angel investing.
Startups often seek angel investment when they're ready to accelerate their growth. Once those investment dollars are in place, the company hires staff to execute its business plan.
Angel investors also get to meet many intriguing people.
Entrepreneurs can be intelligent, driven individuals who see unique solutions to some of the world's problems. Angel investors regularly connect and engage with these founders, giving the investors incredible access to exciting thinkers.
Diversifying your investment portfolio is another reward for angel investing.
Allocating part of your portfolio, say 5%, to angel investment opportunities, can insulate you from stocks' and bonds' ups and downs. Since startups don't trade their shares on stock exchanges, they're often protected from market fluctuations.
These are some of the most significant rewards for angel investing. Now let's go over the risks.
The Risks of Angel Investing
Not every startup can take the world by storm as Google did. And even some wildly successful companies can take a long time to turn a profit.
There are many risks when putting money into startup investment opportunities.
For one thing, a startup has to overcome barriers before it can start making money. The company has to let its target market know it exists and, in some cases, might have to educate its audience about why they need what the business sells.
There can also be regulatory or legal issues the startup has to work through.
Ride-hailing startup Uber confronts regulatory challenges in many cities around the globe. These regulations force the company to spend a lot of money on working with governments. Uber paid $2.36 million for lobbying in 2019. Still, its technology and pending move into the automated vehicle business intrigues investors and could eventually lead to big returns for the company's early angel investors.
Some startups may face entrenched competitors they have to battle for market share, and investors may need to weather an early storm.
Southwest Airlines started in 1967 as Air Southwest Co. Shortly after that, three major air carriers filed a lawsuit against the startup alleging antitrust violations.
Southwest eventually won the case, but it took three years. And the company still had to fight for market share against some of the world's largest companies. Ultimately, though, Southwest proved to be a boon for early investors with the patience to see through tough times.
Another risk with angel investment opportunities is that they're highly dependent on the people running the startup.
Although there's a chance of backing a company with poor leadership, smart angel investors look into the background of a company's founder to gain faith in their investment. For example, angel investors made a tremendous ROI on Spotify, and the company's success shouldn't have been a surprise to those familiar with Daniel Ek, its founder. Ek had previously founded Tradera, which was bought by eBay, and Advertigo, which was bought by TradeDoubler, and he served as the CEO of μTorrent, which was bought by BitTorrent.
Angel investing also has a timing risk.
Angel investing returns generally come from two occurrences: when a startup releases its IPO, or another company buys it. Market and economic conditions can impact both events.
Vacation rental marketplace Airbnb started 2020 planning for an IPO sometime during that calendar year. Then the COVID-19 pandemic wrecked Airbnb's business, and the company might delay its IPO until the economy improves. It appears the company's angel investors might just have to wait a bit longer to see their returns.
Pros and Cons of Angel Investors
Angel investment opportunities come with many of the same risks of any other form of investing.
However, there are ways of mitigating such risks. Do proper research and have patience with the company you've trusted with your investment. Investing in a company you believe in and watching it grow can sometimes be just as rewarding as seeing big returns.
Additionally, a little bit of risk doesn't mean angel investing isn't a wise choice for your portfolio. The returns from one investment can cover your losses and still leave you with a profit.
Not to mention that angel investing can help you diversify your investment portfolio. Financial planners recommend devoting about 5% of your portfolio to angel investing.
Plus, angel investment returns aren't the only reward for angel investing. You'll get to meet exciting people, support causes you care about, and help create jobs.
Yes, there are risks to angel investing. But many investors find the pros outweigh the cons.
Would you like to learn more before becoming an angel investor? Checking out these examples of angel investors can be a fantastic way to decide.
If you think angel investing is right for you, check out this part of our guide to learn how to become an angel investor.
And if you're ready to get started as an angel investor, the Angels & Entrepreneurs Network is a great place to start.