by Alex Day

Making money by investing in early stage companies has generally been reserved for the ultra wealthy through venture capital funds.  Early stage companies (or Startups as they are known) represent an equity class that is not understood by many people, and not available to many people.  Unfortunately, for those few who do attempt to invest in this asset class, they often have a bad experience because of an extreme lack of experience. 

Financial advisors and professional service providers such as attorneys and accountants do not recommend investing in this asset class.  And most of the time this is wise counsel.  The due diligence that is required to invest in an early stage private placement of equity is beyond the capability of novice investors and can often result in bad investments.  As someone who has been investing in this asset class for several years, I wanted to point out some of the reasons you should consider getting involved in angel investing, and providing some pointers on how to do it. 

1.       Entrepreneurial companies can have strong societal impact.  Early stage entrepreneurs are often times quite visionary and see things that most people just cannot see.  This allows them to push through barriers and accomplish things that can have a great positive impact on society.  Supporting these entrepreneurs as an angel investor provides the opportunity for you to make money, and also have a strong societal impact.  And following and getting involved with entrepreneurs can be a lot of fun.

2.       Make it an investment strategy.  If you are going to get involved with investing in early stage companies, be sure that this becomes a part of your financial planning strategy with the intent of providing positive financial returns.  I don’t recommend approaching it as a hobby (although you can still have fun doing it), because it can become a very expensive hobby. Let your financial advisor know that you want to dedicate some of your high risk funds to this area.

3.       Utilize a portfolio approach.  As with so many things in the finance world, angel investing is a numbers game.  Many, if not most, of your investment are not going to perform they way you want them to.  But if you are going to get involved in this area, be sure to target having a portfolio, not just investing in a single company.  Experts suggest that after you have 20 companies in your portfolio, your chances for strong financial returns go up dramatically. 

4.       Get involved with people who have done it.  Join an angel club that has experienced angel investors and learn from them.  The Sheltowee Business Network is establishing an angel network, but there are others with different approaches.  Here in Kentucky there are the Bluegrass Angels in Lexington, the Tristate Fund in and the Keiretsu Forum in

5.       Apply discipline to your approach.  The key to successful angel investing, is good due diligence.  This means digging into the company and finding out if it is truly worth the investment, or if there are major red flags that make it apparent you should not invest in the opportunity.  This is where being a part of a group like the Sheltowee Business Network can be helpful.  You can surround yourself with people who can help carry the load on the due diligence process.