Understanding Angel Investing

18 May 2022

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Information in this article is dedicated only for Accredited Investors (AIs). Find out whether you’re eligible to become an AI with us and get access to PE and VC through StashAway Reserve

Not an entrepreneur? Here’s how else you can play a part in growing a startup. 

If you’ve ever watched Shark Tank in the US, or Dragon’s Den in the UK, you probably have a rough (and sensational) idea of how angel investors operate. Or maybe you haven’t heard much about angel investing, but you’re interested in learning more.

Angel investing doesn’t get much coverage in financial news, especially compared to topics like the stock market, government bonds, or real estate. So you’d be forgiven if you haven’t thought much about getting started as an angel investor. After all, it isn’t easy to find angel investment opportunities without being part of a network.

At StashAway, we want to make angel investing simpler and more accessible. But first, we’ll cover how angel investing works, and the potential benefits of becoming an angel investor.

Key takeaways:

  • Angel investors are usually high net worth individuals who invest in an early-stage startup in exchange for a share of the company.
  • While angel investing is much riskier and less liquid than investing in the public markets, it helps diversify portfolios and can offer greater returns than traditional asset classes.
  • With StashAway Reserve, Accredited Investors can invest in 10 to 20 early-stage startups.

What is angel investing?

Put simply, angel investors provide funding and support for early-stage startups to build and scale their businesses. In return, these investors receive a percentage of the company. Unlike venture capital firms, which are large institutions, angels are high net worth individuals that directly invest their money.

Usually, angel investing occurs at the earliest stages of a company, sometimes when the product is still only an idea. In fact, there’s a lot of focus on the startup’s founders. That’s because these companies are usually at such an early stage that investors are betting mostly on the founders’ capability to make their vision a reality.

Because of this, angel investing can be very risky, so investors tend to diversify their portfolios across a relatively large number of companies. Using a baseball analogy, angel investing is a “grand slam” business – this means investors expect one or two really big hits instead of maximising the number of hits they get.

How does the angel investment process work?

Angel Investing 1

Angel investors look for potential companies to invest in

The first step in the angel investing journey is finding potential deals. This is called the deal flow.

The more founders you talk to and startups you discover, the more opportunities you’ll find that can become good investments. Ideally, you want your deal flow to be very large.

There’s a rule for startups called the 100-10-1 rule:

  • Out of every 100 startups an investor reviews,
  • 10 are selected for further analysis, and
  • 1 ends up a good opportunity.

So you can see why it’s important for angels to maximise their deal flow.

Angel investors tend to join groups, or networks, where they share potential deals and research the most exciting opportunities. The members of these networks tend to be experienced executives, entrepreneurs, and investors who are interested in finding great startups to invest in.

Investors then closely research each startup

Once angels find potential startups, they do their due diligence. You can think about this as the research side of the work. For each company they look at, angel investors:

  • speak with the founders;
  • analyse their pitch deck;
  • evaluate the potential market size of the business; and
  • scrutinise the business model.

Different angel investors have different styles and preferences for what they want to see in a company. At the end of the day, whether an angel decides to invest in a company will be a highly personal decision based on their analysis and risk tolerance.

One of the benefits of being part of an angel network is that individuals can leverage the expertise that other members have in a particular industry or country. There’s always uncertainty with angel investing, so it’s good to have access to some additional expertise and information.

Investors negotiate terms with startup founders and close the deal

After the due diligence phase, investors will negotiate with the startup founder(s) on the terms of the deal. Most of the discussion revolves around the amount of money the investor will commit and the percentage of the company that they’ll receive. Once everyone agrees on the terms, the angel sends the money and receives a stake in the company.

Angel investors support and advise their startups to help them succeed

Usually, angel investors provide some sort of additional support beyond financing to the companies they invest in. The specific form of support can vary, but in many cases it includes introductions to business partners, help with marketing and PR, and technical advice on the product, among other things. This is another reason why angel networks are so valuable – founders get easy access to the expertise of a large number of executives and entrepreneurs. All this increases the chances of a startup succeeding.

Exit the investment, ideally at a higher valuation than before

Finally, and normally after many years, angel investors will earn a return on their money once they exit the investment. If a startup has performed well, it’ll most likely raise more money at a higher valuation than before. This means that the angel investors will be able to sell their shares at a higher price than what they originally paid.

It’s important to mention that most angel investments will see little to no return, which takes us back to our baseball analogy. Successful angels don’t expect that 20 out of 20 investments will be home runs. They expect that maybe 1 or 2 will succeed, and that the gains from these will far outweigh the losses in their other investments.

Is angel investing profitable?

While angel investing is riskier and less liquid than investing in the public markets, it can offer greater returns. A 2016 study of angel returns found that angel investments have an average internal rate of return of 22%, which outperforms many other asset classes like stocks and bonds.

Angel Investing 2

What are some other benefits of angel investing?

Angel investments help to diversify your portfolio

If you’re already invested in the stock and bond markets, alternative assets such as angel investments can further diversify your portfolio. This is because the performance of early-stage private companies generally has a low correlation to the performance of traditional asset classes. How well your angel investment portfolio does is mainly driven by whether the founders can successfully execute their idea and take it to market, rather than by economic or market conditions.

You get to be part of a company’s growth and success 

Angel investors get front-row seats to the growth of new technologies. Getting to be a part of growing the startup scene and having an ownership stake in companies that could transform the way we live – without having to be an entrepreneur – is a benefit that’s unique to angel investing.

Southeast Asia’s tech boom is creating opportunities in angel investing

Southeast Asia is home to one of the most exciting and dynamic startup scenes in the world. The COVID-19 pandemic made many people more reliant on the internet for their daily needs.

As a result, many tech startups in the region have recently attained unicorn status – this means reaching a valuation of $1 billion USD or more. These include Sea and Lazada in Singapore, and GoTo and Traveloka in Indonesia.

That said, there’s still a lot of untapped potential. Southeast Asia has a larger population than the US and is only at the beginning of its digitisation journey.

According to Google’s e-Conomy SEA 2021 report, the gross merchandise value (GMV) of Southeast Asia’s internet economy could reach $1 trillion USD by 2030, up from $174 billion USD in 2021.

Angel Investing 3

In addition, 70% of the region’s population is currently underbanked, and only 5% of retail transactions today are conducted through e-commerce.

Angel Investing 4

Entrepreneurs need funding and support to take their products to market and make their visions a reality, while Accredited Investors need easier and simpler access to high-quality investment opportunities. We aim to close this gap with StashAway Reserve.

Invest in 10 to 20 promising early-stage startups 

We’re collaborating with XA Network, Southeast Asia’s foremost tech leaders’ investment network, to give Accredited Investors access to angel investing.

By becoming an angel investor with StashAway Reserve, you’ll join the ranks of XA, whose members include senior tech leaders from Grab, Lazada, and Netflix, among others.

Ready to start your angel investing journey with StashAway Reserve?

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