SINGAPORE,. Stories abound about angel investors who made fortunes by putting money into start-ups. While more people than before can invest in start-ups, there are still plenty of risks and you’ll need to assess the start-ups carefully before you put money into them.
Very simply, angel investing is putting money into start-up companies set up by entrepreneurs.
Most investors put money into start-ups in the hope that they will make big returns. Early funders of Microsoft and Facebook or other big companies are now millionaires, for instance, which sounds attractive.
There are, though, people who have other reasons for investing. Some successful entrepreneurs, for instance, want to invest and provide advice so that they can help other budding entrepreneurs follow in their footsteps. Other people simply want to help friends pursue their passion. And still others are enthralled with learning about new technology.
There are, then, a variety of types of angel investors. The most common are family and friends who want to help an entrepreneur who has a great idea.
Some people simply hope to make a lot of money. Others are interested or wealth individuals who want to back good ideas.
The money invested in start-ups can also go in at various times. “Seed” investors put their money in at the very beginning, when the entrepreneur is starting up and needs funds simply to survive.
Others put their money in at later stages, when the start-up is gaining traction or growing larger and potentially becoming profitable.
Finding something worth investing
Angel investing used to be mostly serendipitous, when you happen to hear about a great idea from people you know.
While that still happens, there are also a variety of other ways that people who want to invest in start-ups can find out about them.
One is to take part in events organised by associations or companies that assist angel investors.
The Business Angels Network of South-east Asia (Bansea), for instance, has been promoting the angel investment community through workshops, research and networking since its founding in 2001.
Angel Central, itself a start-up, was recently established to link investors to start-up opportunities.
Another is to look for crowdfunding platforms such as Fundnel, which help start-ups raise money and enable investors to put their funds into early-stage companies.
You can also learn about angel investing through talks or YouTube videos. For more personalised learning, organisations such as the Angel Capital Association provide courses or webinars that educate potential angel investors on topics such as portfolio strategy and evaluating start-ups.
And there are events as well. You can look on EventBrite or Peatix to find events related to angel investing, for example, or check out talks at incubators that large companies here have set up to support start-ups.
Although investing in start-ups might sound like an easy way to become rich, the reality is that you can lose money very easily. Research shows that anywhere from 60 to 90 per cent of start-ups fail. Those results mean you are far more likely to lose your money than to make anything at all.
If you do invest, you’ll need to have a high tolerance for risk and realise that you could well lose everything.
Even if the start-up does succeed, it often takes a long time. Angel investors often have to wait five to seven years to see any return.
Given the risk, experts suggest not putting more than about 5 or 10 per cent of your funds in start-ups.
One way to mitigate the risk is to invest in a pool of start-ups. Bansea set up the Bansea One Fund, for instance, so that angels can pool the risks and share the rewards.
Crowdfunding platforms such as Fundnel and Crowdo similarly offer pooled investments periodically.
Angel investing definitely requires you to have time, interest, money and a tolerance for risk.
Given that the risks are high, regulators have decided that not everyone should be able to invest unlimited amounts in start-ups formally.
Whereas the United States allows almost anyone to invest up to US$2,000 (RM8,063.20) per year, companies and platforms here that are registered with the Monetary Authority of Singapore generally require investors to be accredited, meaning that investors need to have personal net assets worth more than S$2 million or an annual income of at least S$300,000.
That said, it can still be possible to invest even if you aren’t as wealthy as accredited investors.
If you are willing to put your money into start-ups in Malaysia or Indonesia, Crowdo says that “everyone can become an investor”. Funded Here says it allows professional investors with an income of at least S$100,000 to invest in promising businesses.
And you can still put funding into start-ups run by family and friends on a relatively informal basis, though preferably with a written agreement so you are protected when the investment succeeds.
If you are willing to take the risk, becoming an angel investor and putting money into start-ups can offer good returns. However, should you decide to invest, it’s best to spend time learning about angel investing and figuring out how to deal with the inevitable risks that come with new companies. — TODAY