Angel Investing Success Rules

Thinking of forming an angel investment network in your area? One bit of advice: Do it right and encourage the right type of investments.

Angel investing: where wealthy individuals invest both seed capital and industry expertise in start-up companies – is the hidden engine of the economy’s growth. Angels invested nearly $50 billion in 2004—almost 10 times the amount committed by venture capitalists.

Having learned the lessons of the freewheeling (and money losing) land-grab of the glory days of the internet explosion, Worth Magazine say that angels now abide by a more stringent set of guidelines when deciding which better mousetrap to back. These include:

1. Taking a cumulative stake of 20 to 30 percent in a start-up. While most investments go as high as $2 million, most happen in the $100,000 to $1 million range.

2. Pacing commitments with an eye to the company’s future capital needs. This is critical when additional capital is needed to survive future liquidity events.

3. Sensibly pacing the disbursement of capital. This provides a welcome measure of control over the company while limiting exposure if something goes wrong.

4. Not skimping on due diligence. Investors now use network contacts to check on entrepreneurs’ reputations and ability, while asking tougher questions about their plans.

Successful investors “do a better job of separating business proposals that are genuinely promising from those that are merely cool,” the cover story explains. “They understand the need to scrutinize balance sheets and to coddle and coach their entrepreneurs. They know they need to strike deals with founders that get the most mileage out of their seed money and that protect their interests when things do go wrong, and they are better able to get additional rounds of funding from the big venture capital firms without finding themselves relegated to the sidelines.”