Investing in early stage ventures or startups can be financially and personally rewarding, however it is highly risky as there is no guarantee that (i) a Fund’s investment objectives will be achieved, (ii) a Startup will achieve its business plan, (iii) a Lead Angel has experience in investing, or (iv) an Investor will receive a return of any part of its investment. The following should be carefully evaluated before making an investment into a Startup or fund.
Acknowledging these risks allow for ways to mitigate them:
- Failure of many business ventures
Statistically 9 out of 10 Startups fail within the first 5 years. One of two will result in positive ROI; breaking even and returning a profit might take several years, however, the positive ROI obtained from the one or two businesses out of 10 tend to exceed the negative ROI obtained from the unsuccessful ventures. Angel investors should consider diversifying their portfolios by spreading investments along a number of ventures among a number of ventures and industries.
- No assurance that target results will be achieved.
The past performance of a Startup or its management, a Lead Angel, or principals of Advisor, is not predictive of a Startup’s or a Fund’s future results. There can be no assurance that targeted results will be achieved. Loss of principle is possible, and even likely, on any given investment.
- Angel investments are illiquid
Unlike conventional investment instruments such as stocks or mutual funds, Angel investments are illiquid, which means Angel investors usually cannot sell their stake in the business to any public market in order to help minimize loss. So if making an investment, an Angel Investor should consider investing in businesses in which s/he has experience or expertise in so s/he can properly assess the product and market opportunity and also provide advise or insights to help keep the business on course.
- Difficult to Value Startups
Generally, there will be no readily available market for a Startup’s equity securities. Startups also have limited operating history, which means they might be pre-revenue or might not have assets or liabilities that they can value.
- Lack of Investor Control in a Fund
Investors in a Fund will not make decisions with respect to the management, disposition or other realization of any investment made by the relevant Fund, or other decision regarding such Fund’s business affairs.
- Confidential Information
Certain information regarding the Startups will be highly confidential. Competitors may benefit from such information if it is ever made public and that could result in adverse economic consequences to the investors.
Despite the risks associated with Angel investing, it is still thriving in China because the rewards can outweigh the risks. Being a member of an Angel group such as AngelVest can greatly help mitigate risk.