1. Startup

A Starter Kit to Become Angel Investor

Becoming an angel investor in a startup can started with a more affordable budget

Based on data compiled by DailySocial, there are at least seven deals in Indonesia that have announced to receive funding from angel investors in 2020.

In a recent conversation with DailySocial, Edward Tirtanata once mentioned the landscape of angel investors in Indonesia. He said, the current angel investor ecosystem is not very developed. In fact, quite a few startups seek access to early-stage funding through this route.

Indonesia currently has an angel investment network through ANGIN (Angel Investment Network Indonesia), however, if you refer to information from a number of startup founders, there is not much access to connect with angel investors. The existence of angel investors in Indonesia is not actually non-existent, it's just that they tend to avoid exposure.

In addition to access, there is another issue that is quite interesting and gain much attention, the amount of investment value to become an angel investor. Can someone who was not quite rich, be an angel investor? If the answer is yes, what is the ideal value should one has to become an angel investor?

Angel Investor's definition

In a blog written by journalist and investment observer Chris Muller, there are some tips that can be implemented by anyone who wants to try their luck as an angel investor, even though they may not be rich.

Before we get there, let's clarify what an angel investor is. Muller defines it as someone who has enough money to invest in an early-stage business or an existing business that is already growing. Similar to investors in general, angel investors crave a return on investment which is usually in the form of equity in the company or revenue sharing.

As citing Entrepreneurs, their motivation to invest is not solely for profit, but based on the desire to help new business. Angel investors can come from various professions, such as doctors, lawyers, suppliers, or business partners. Unlike the VC which stands as an institution to invest other people's money.

When referring to regulations in the United States (US), anyone can become an angel investor as long as they meet the requirements as an "accredited investor" by the Securities and Exchange Commission (SEC) Stock Exchange Commission, which is to have a net worth of $1 million or more (excluding residence principal) and earns $200,000 per year.

How much capital required?

Back to the first question, is it possible to invest in a small amount of money? How much does it take to become an angel investor? Muller revealed, referring to recommendations from experienced investors, investors allocate up to 10% of the portfolio for angel investment.

This might not answer how much is actually required. The easiest answer that can be given is that it depends on the type and size of the targeted investment. If you copy the references to the television show Shark Tank, you can start with an investment of hundreds of thousands of US dollars.

In fact you could have invested on a smaller scale, says $10,000. However, Muller highlighted that the smaller the investment, the smaller the shares owned (and of course the profits). This amount can also be a factor that affects the involvement of investors in making business decisions.

He gave an example, if the total investment in the portfolio is $100,000, this will fulfill the 10% portion as mentioned earlier. However, if you want to invest in a good startup business, he recommends having at least $50,000 – meaning your overall portfolio can be close to $500,000.

Meanwhile, quoted from Pluang blog, Angel Capital Association data noted that investors with entrepreneurial backgrounds invest an average of $39,000. There are also those who invest an average of $28,000. There is no specific amount, it all depends on the investor and the targeted business.

Collectively, global angel investors set aside up to $24 billion to invest in 64,000 startups each year.

Pros and cons of angel investors

Basically, investing is not just a way to enjoy profits. It's a risky movement and you could lose probably all of the money – even if the company underperforms or goes bankrupt. Other data from the Angel Capital Association shows that at least 50% of angel investors lost half of their funds.

Moreover, we need to underline that this is an investment, not a loan. One of the reasons why businesses prefer angel investment is because it is not recorded as a loan on their balance sheet. Angel investors buy part of the company. This means that there is another way if the business fails and you lose money than bothering to take action if it is a loan that cannot be repaid.

On the other hand, angel investment can also potentially generate very high returns. Muller gave an example, Peter Thiel's investment in Facebook has become one of the most popular angel investments. Thiel injected $500,000 into Facebook in 2004 before Mark Zuckerberg's platform went public. If only Thiel hadn't sold his 80% stake by now, Thiel's stake could be worth $10 billion today.

Another plus side is that you can build your company the way you want. Angel investment makes it possible to acquire ownership of the company, which automatically enables you to be involved in making decisions. However, this is all provided that it refers to the size of the investment and the agreement you make with the business owner.

What is also important is investment diversification. Muller said, angel investing gives investors the option to expand their investment portfolio, such as stocks, bonds, and exchange traded funds (ETFs). Investors can become part owners of the company and pocket returns in the form of company profits.

Does angel investment profit?

Still referring to the Pluang blog, a number of angel investors reported returns ten times higher than their initial investment after selling their shares in the company.

Based on a number of studies, only 5-10% of angel investments are recorded for profit. On average, 11% of funded companies generate positive exits. It also has a variety of exit results.

Thus, not all exits are profitable for angel investors. All of this goes back to the research conducted by investors regarding the company and the business category to be funded. First understand the business you want to fund before deciding to invest.

Original article is in Indonesian, translated by Kristin Siagian

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