Should I BECOME A W
hether you should
become a business angel is not
By JON MOULTON, Guernsey-based Chairman of Better Capital
an easy question to answer! First of all decide why you want to do it – return, trying to exploit your personal knowledge, doing something socially useful or just dissipating the wealth so that the kids can’t get it!
Investing in minority stakes in small or start up companies is a very risky activity. Something like two thirds of all start-ups fail (and typically you lose the lot) and only a small percentage actually make the attractive multiples on an exit that you might dream about.
A short list of the things that can go wrong: • The product becomes obsolete or never works.
• The product is
uncompetitive because of cost.
• Existing or new competitors can wipe you out.
• The management turn out to be idiots or enthusiasts.
• It needs a lot more money than you thought and later funders dilute you to a fragment.
• You are given hopelessly optimistic forecasts (actually the norm) and you invest at far too high a price.
BUSINESS ANGEL?
• You are misled, lied to or little details like the CEO’s past failures are not shared with you.
• Fraud and/or greed from the controlling shareholders.
• There is no exit mechanism so you get screwed by the majority when you need to move on.
• It takes a lot longer (again the norm).
There are many more ways to get in trouble.
Even the best of “due diligence” before you invest leaves you open to all of the above happening over the typically 7 or so years you will have to wait for a good exit. I do a lot of this kind of investing and I think I am good at it and I still lose one third of the capital I invest. Consider yourself thoroughly warned!
So why do I do it? Actually
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20/20 Finance & Investment
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