Some of the key success factors for angel investing
The interviews made for OECD Document highlighted several key areas and approaches that are important for successful angel investing.
Experienced former entrepreneurs as angel investors
Successful entrepreneurs who become angel investors, not only reinvest the gains they received in their companies but are able to share their experience with new entrepreneurs and help them build their companies. Not every individual investor should be considered a potential angel investor – many are simply financial investors.
Due diligence prior to investment
Conducting due diligence on start-up companies is difficult (as there is very limited data available) and time consuming (technical, business and personal checks are necessary). Individual angel investors can find it costly and overwhelming and this is often a reason they seek out groups or networks, where the work is shared or conducted by a professional. However, sometimes angel investors, especially individual ones, will skip due diligence and invest on “gut” feeling. Research by Professor Wiltbanks has shown, both in the United States and the United Kingdom, that any amount of due diligence improves returns and therefore it is critical for all angel investors.
Investing in sectors in which the angel investor has experience
This should go without saying but sometimes angel investors become interested or tempted by companies outside of their area of expertise. In those cases, there is a greater chance of making a bad investment decision. In addition, the angel investor will have less ability to help the company in which they have invested. Research by Professor Wiltbanks has shown that there is a correlation between experience in the sector and investment
Even with careful screening and due diligence, the majority of angel investments will lose money as most of start-ups do not succeed. However, by using a portfolio approach to investment (i.e. investing in several companies over time and not just one or two), angel investors are much more likely to yield a return on their investments over time as they are spreading risk amongst a portfolio of companies, rather than putting all bets on one company.
Training, mentoring, coaching for new angel investors
It is important to continue building the pipeline of angel investors, particularly since at some point existing angel investors will have a fully invested portfolio and be temporarily unable to make new investments. As pointed out in other parts of the report, angel investing requires specific skills and therefore training, mentoring and coaching is a critical part of the process.
Well-functioning entrepreneurial ecosystem
This point came up over and over again in the interviews. There must be a well-functioning entrepreneurial ecosystem (described in Chapter 2) for the angel investment model to work and the market to grow. Efforts to try to jump-start an angel market in which other players in the ecosystem do not yet exist are likely to fail.
Social capital and networks (local and, increasingly, international)
Often the focus, particularly by policy makers, is on tangible investments such as in infrastructure. However, in a well-functioning ecosystem, it is the human capital and the relationships between key players which drive entrepreneurial activity. This is evident at the local level and, increasingly at the international level. High-growth firms need to grow beyond national borders and personal networks are critical in facilitating that growth.
OECD (2011), Financing High-Growth Firms: The Role of Angel Investors, OECD Publishing.