Why Angel Investors don't make money...
Vinutha Raju | October 08,2012 12:32 pm IST
Venture capitalists are helping Indian entrepreneurs in starting businesses across sectors, ranging from healthcare, education, internet to mobile applications.
What started as, one- off investments in early 2000s by large institutional investors in large companies, we now have risk investors across the value chain.
Private equity investors investing in growth companies, SMEs, buy-out funds, PIPE investors, seed fund, incubators and angel investors.
Angel investors are usually successful entrepreneurs and individuals who invest small amounts in start-up companies. Their unique value is they invest in companies even before the product/service is ready for market. They not only provide capital but are closely associated with entrepreneurs and mentor them. But this is one of the riskiest businesses. The product/services are not validated, the management team at best is nascent and inexperienced, market may not be ready, technology may not be tested....etc. The risk is very high.
The Author, Andy Rachleff, President and CEO of Wealthfront , a SEC registered financial advisor writes about the perils of being an angel investor. He has been a venture capitalist and angel investor for 25 years.
Andy writes about his experience of investing in start-ups and the probability of success of start-ups. He elaborates that the success rate are quite abysmal and quotes a study conducted by the Cambridge Associates which states that only 3% of the universe of venture capital firms generate 95% of industrys returns, much lesser and skewed from the usual 80-20% ratio.
He suggests that the angel investor should diversify his portfolio, invest in multiple sectors and companies to spread his risk. Many Angel investors invest more for the love and the rush of excitement in creating something new rather than making profits. Read on......