Angel investor myths busted by Sydney Angels
Angel investment makes a critical contribution to our startup economy and increasingly to our national economy. Not only can angel investment offer superior investor returns, it is a vital step in the startup growth phase, as budding businesses rely on an angel round before they transition into raising venture capital.
In the past five years, the majority of Australia’s most successful startups were funded by some form of local angel investment.
Despite this high impact outcome, the area remains shrouded in mystique for many entrepreneurs and potential investors. Perhaps this is why Australia has one of the lowest rates of angel investment in the world, falling well behind the US, Canada, South Korea, the UK and even New Zealand on a per capita basis. According to the recent StartupAus Crossroads report, around $275 million was invested in 2014 by Australian angel investors. This is in comparison to the annual A$32 billion committed by angel investors in the United States.
With powerful growth in our pipeline of Australian startups, it’s time to correct a few common misunderstandings about this important form of investment.
MYTH #1: YOU NEED MILLIONS OF INVESTMENT CAPITAL TO BE AN ANGEL INVESTOR
Investors are often surprised at how little investment capital is required, or even encouraged at the angel capital stage. The typical angel investment amount from an individual investor is between $15,000 – $50,000 per company. At Sydney Angels, we encourage our members to use a team-based investment approach, meaning a startup may attract as much as $500,000 at no greater investment cost to the individual investor themselves. This is a valuable process for both parties, given the investment risk is shared amongst the syndicate of sophisticated investors, and startups receive an entire team of mentors who can share with them their experience and expertise.
MYTH #2: ANGEL INVESTORS ARE JUST IN IT FOR THE MONEY
The premise of angel investment is as much about making a contribution to the startup business community as it is about returns on investment. Whilst angel investors target a for-profit equation – and the returns can be great – educated investors don’t expect to see a return from a successful startup before five years.
For example, Sydney Angels’ members offer a much broader range of support than simply investment, such as ongoing advice and experience, and access to business networks. While they definitely try to help the business, they certainly don’t want to take control away from the founders and will always take only a minority equity stake. In addition, startups in which Sydney Angels members invest can receive matching investment from the $10M Sydney Angels Sidecar Fund, making it easier and faster to close funding rounds at the target amount.
MYTH #3: MOST ANGEL INVESTORS ARE RETIRED MALES
Whilst it’s valuable to have some time to spend working alongside your startup teams, most serious angel investors (and certainly Sydney Angels’ members) remain active in the workforce across a range of sectors. Some are successful entrepreneurs, others are high-income professionals and some are independently wealthy or semi-retired. All are commercially very active, experienced and well connected. There is also now a strong and growing group of female angel investors, as women are learning about the opportunities to get involved in this area.
MYTH #4: WOMEN-LED VENTURES DON’T GET BACKED
The proportion of female founders for Australian startups in 2013 was 19% with angel groups leading the startup investment community when it comes to backing female ventures; This is in contrast to the number of Australian companies with a woman CEO receiving venture capital investment, which is suspected to reflect the low, US finding of 3%. With female-led ventures only anticipated to rise, Sydney Angels is actively growing its female participation at both its applicant and member levels.
MYTH #5: ANGEL INVESTMENT DOESN’T DELIVER RETURNS
Angel investment is certainly a high-risk area. Half of all startups, even after good screening, due diligence and post-investment help, will fail to return what was invested. But these losses can be more than compensated by the few that return 10-30x the initial investment. The key to making returns is to have a portfolio of enough investments to contain some of these big winners. Those who use a disciplined investment process to build portfolio can see extraordinary returns from the startup sector over time.
A large scale study undertaken by the Kauffman Foundation and NESTA found that angel investors in the US and UK generated an average return of 2.5 times the amount invested in a mean time of four years from investment to exit, equating to a very healthy 26% internal rate of return.
Sydney Angels is a well-established group that helps its members collectively screen deals, use good investment process, add value to their investment and build personal portfolios big enough to make strong returns. In the past five years, several of Australia’s strongest performing emerging businesses have received seed funding from Sydney Angels – one example being the taxi services app and mobile payment provider, ingogo.
While naturally some startups haven’t succeeded, the founders of these have in several cases gone on to launch or lead new ventures, equipped with the skills and experience gained through Sydney Angels – this in turn helps Australia’s startup ecosystem overall.
This article was originally posted on BRW.