Angel investing mistakes to avoid

Wealthy individuals and families who are looking to diversify through angel investing, by providing resources or capital in exchange for a stake in promising businesses, should be wary of the inherent risks involved.

Eric Enslin, CEO of FNB Private Wealth and RMB Private Bank, says South Africa has a number of highly capable and innovative entrepreneurs who are willing to share a portion of their ventures with investors in order to get a head start. This presents endless opportunities for wealthy individuals who have a keen eye for talent and are eager to back viable concepts and business plans in order to make a good return.

“However, angel investing remains risky and can result in financial losses if proper due diligence is not conducted,” cautions Enslin, as he shares some of the common mistakes to avoid:

• Expecting guaranteed success – to be a successful angel investor you need to have an appreciation for entrepreneurship.
  
  Given the high failure rate of new businesses that get started in South Africa, you have to make room for failure, as success is never guaranteed.
• Anticipating quick returns – notwithstanding the quick success rate of some businesses, the reality is that you may only begin reaping the rewards after five to ten years. Therefore, patience is key.
• Investing in expert advice – this is essential and forms part of the due diligence process. You need to be adequately informed about the industry sector, type of business, current and past trends, as well as risks, in order to determine if you are making a good investment.
  
  Seeking advice from knowledgeable experts who have earned their stripes in this field can only work to your advantage.

• Placing too much emphasis on the concept – although you may have been attracted by an innovative concept that you anticipate disrupting a particular market, there are many other qualities and characteristics that determine the success of a business.
  
  For example, a comprehensive and succinct business strategy, drive and determination of the leadership team, passion, risk appetite, expertise, financial management, regulation and business culture, amongst other factors.
• Not playing an active role in the business – angel investors often offer more than just capital injection. This can be in the form of mentorship support or offering strategic direction as an executive board member.

“Angel investing forms part of a long term investment strategy and should therefore, not be rushed into, but rather carefully considered and researched in order to prevail as part of a sustainable wealth plan,” concludes Enslin.