Angel investors offer a lifeline to small business owners. They invest their hard earned cash in start-up businesses that cannot be funded anywhere else. In return, they often expect a portion of that small business.
This is a big risk! If angel investors get it right, the rewards can be amazing. But if they make a mistake, they risk losing their entire investment. It is certainly not for the unconscious heart!
Here I take a look at the top three mistakes made by experienced angel investors. What have they learned from their mistakes?
1. Accept everything at face value
We’ve all seen the dragon’s den. “I’m here – I’ll give you an offer!” Dragons scream when they want to invest in a runaway business.
But this is just the beginning of the process. After the pitch comes the proper hard work. Dragons pour in the financial information of the business to find out if the pitch is correct. What are sales statistics? Does the business owe? How much cash is it? What nasty surprises should angel investors know about?
Chantelle Arnaud (an investment platform that connects investors and entrepreneurs) from investors warns that even proper hard work is sometimes not enough. Business owners can sometimes hide significant problems from an angel investor. He spoke to an angel investor who “describes how a business failed to disclose that it provided six figures in VAT. This statement, when included, showed the business was bankrupt. If the business goes bankrupt, the angel investor loses all their money.” .
To protect themselves, Chantelle advises that investors “always work with firms regulated by the Financial Conduct Authority (FCA). FCA rules are designed to protect investors and firms must ensure that information is ‘clear, fair and not misleading.’ ‘
2. It does not examine who owns the intellectual property
Intellectual Property (IP) rights mean that the pitching business has an exclusive right to sell its own products. Without IP rights, there is a risk of launching Copicat products. Intellectual property may include inventions, literary and artistic works, designs and symbols, and names and pictures.
Angel investors don’t want to spend their time and money just helping to create a business so that it is copied by someone else.
But even if the business owner has intellectual property rights for their products, angel investors need to be careful. They should check that the business owner has more business talent than himself. Because if the business fails, the angel investor can be snatched away. According to Chantilly Arnewood, “there is a risk that” if the business is folded, the founder can move away with the IP and establish a uniform business where you have no shares. “
Their. Put all their eggs in one basket
Angel investors often prefer to invest in business sectors that they know well. But it can bring its own problems. Anyone who has just invested in the restaurant business has had a tough journey during the Covid crisis and subsequent lockdowns.
Chantelle advises that “to reduce the risk, [angel investors should] Create a varied portfolio. Experienced angels know that some investments will be lost, others will stagnate, and some will skyrocket. Make sure you get enough spreads to balance the risks. ”
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