Save up to 74%
Subscribe to Kiplinger
Investing in startups provides many opportunities, adding direct participation, equity crowdfunding platforms like StartEngine, and syndicates. These platforms allow Americans to invest small amounts, starting at $10,000, in startups.
While these investments in startups can be very profitable, they also carry significant risks. Statistics show that nine out of 10 new businesses fail. Unfortunately, there is no guarantee that startup projects seeking investment will be successful. If you really want to invest in a startup and need to maximize your chances of profitability, it is an art that requires learning and a deep understanding of the landscape.
I am a business angel founded in Kazakhstan, with nine years of experience in making investments in startups. My portfolio includes 52 generation projects covering the United States, Northern Europe, Africa and Asia. Last year I managed to get out of five projects. , selling my shares for $7. 2 million, while facing losses of $250,000. I hope to share my ideas and offer advice to aspiring business angels and those contemplating angel investments.
Be a smarter, better informed investor.
When other people need to become business angels to make really big profits, I sometimes advise them not to. If financial gain is your only motivation, the likelihood of wasting instead of winning is high. So why engage in angel investing? For others like me, the intrinsic benefits are numerous. As a serial entrepreneur with 3 decades in the tech industry, I have a real hobby for generation and innovation. Having financial security allows me to focus on creating and supporting promising startups.
Let me highlight the advantages of angel investing:
Here’s why making an angel investment isn’t the optimal strategy for wealth accumulation: generating a source of income in our cash is undoubtedly a challenge. According to a recent study of accredited angel investors, 52% of investments resulted in losses, and 39% of angel investors lost part of their initial investment. Angel investors typically earn returns around three and a half years after making an investment. It is conceivable that a successful exit could make up for past losses.
Therefore, the two primary drawbacks of startup investments are:
I follow the principle that, akin to a samurai preparing for battle, an investor should mentally prepare to lose their money before making any deals.
However, there are measures in place to mitigate investment risks, even for beginners.
In this way, you will be able to carry out projects that have been the subject of a thorough variety through experienced professionals. My own investment adventure began as a limited partner (LP) in a venture capital fund, where a competent team decided on projects and controlled our investments. However, one downside for beginners is that the risk budget sometimes requires minimum investments ranging from $300,000 to $500,000.
If you’re looking to invest smaller amounts, I recommend starting with online syndicates like AngelList or angel clubs. These platforms often have lead investors who conduct initial project evaluations.
Even if you decide to go independent, seek advice from more experienced peers before making investment decisions. I have encountered occasions where former venture fund partners persuaded me not to fund projects that I was susceptible to in the first place.
While relying on the recommendations of your colleagues can be helpful, it’s imperative to invest in spaces that you perceive well. For example, if you have experience in banking, in fintech projects; If you work in the healthcare sector, think about medical technology. Without this knowledge, assessing a startup’s prospects becomes a real challenge. Take AI projects, for example: they are popular today, but only a few will succeed amid market expansion. Understanding those nuances is imperative for an accurate startup analysis.
Initially, spread your investments across at least 10 startups. For instance, with $100,000, allocate $10,000 to each of 10 projects. While some may fail, others could return your investment or yield profits. Conversely, concentrating $100,000 in just one to two projects risks losing everything permanently. Diversification minimizes risk and enhances potential returns in angel investing.
The problem it addresses must be genuine, and its solution should resonate with users. Effective customer development can validate the problem’s existence, while traction confirms the solution’s viability. One critical metric I emphasize is retention rate. If users abandon the product after a month, it indicates either the problem isn’t adequately addressed or the solution isn’t effective. Projects with poor retention rates are not worth pursuing.
As you gain experience through syndicates or clubs, focus on expanding your network and sharing your wisdom with startups. This effort is helping your investor logo and identify your credibility in the market. Over time, you’ll reach a point where you feel confident about investing independently. Personally, I felt like a wonderful investor after 4 years of active participation.
However, don’t be misled if an intriguing startup approaches you directly in the beginning. Often, such startups have already been rejected by more seasoned investors, which can be a red flag indicating potential issues. This might be a bad sign, and such a project is not worth investing in.
This is how you should act in front of a prominent figure in the market and eventually be the first to get quality leads.
An investor is a product in itself, defined by specific attributes. Determine your preferred investment criteria: industries, stages, due diligence benchmarks. Ensure your LinkedIn presence reflects your preferences and expertise.
Successful assignments flow through private relationships. Attend conferences, network as a mentor, and immerse yourself in the venture capital community. Over time, opportunities will present themselves where someone will be successful and say, “Here’s a promising task where your experience can add value. » The conversion rate of leads from your network can reach up to 50%.
Avoid imposing unconventional terms on startups that don’t conform to industry standards. For example, avoid clauses that require reimbursement if the task fails. These types of situations do not mitigate the risks, but they tarnish your reputation. Also, avoid requiring an ownership stake of more than 10% in the early stages of a startup.
The topic of angel investing extends far beyond the theses that can be supported by a single publication. I’ve talked about the motivations of angel investors and shared some must-know tips to help beginners get started. Despite its inherent dangers and prospects given the variability of returns, angel investing remains exceptionally intriguing and rewarding.
By supporting visionary entrepreneurs, we drive progress and pave the way for a technological long-term that was once just science fiction. The rapid advances in AI demonstrate the profound impact these investments are having in shaping our long term.
This article is written and presents the perspectives of our contributing advisor, not Kiplinger’s editorial staff. You can check the advisors’ records with the SEC or FINRA.
During my 30 years in the generation sector, I have had the opportunity to build dozens of successful projects. During my decades of experience as a venture investor, I have invested in 52 cutting-edge startups, represented in the Central Asian, European and US markets. In total, I have invested around $25 million in startups and have had more than 10 successful exits.