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Risk in Angel Investing

An angel investor is essentially an investor who invests in start ups which are unable to get financing from venture capitalist institutions and bank loans. An angel investor may seek different kinds of returns for their investment. For instance, an investor might want to provide funding only in exchange for 10X returns over a period of 5-7 years. However, there will also be those investors who will want to invest only if they are given an ownership stake in the company or a position in the board of members. 

Typically, an angel investor is taking a great investment risk in order to get higher returns than they would get from other investment opportunities. For start up businesses, this is an easy alternative to banks and other financing institutes who are extremely cautious about giving out loans and may need some collateral in order to give loans. New entrepreneurs are less likely to get investments for endeavours that may seem risky to the money lending institutions. As an alternative, there are thousands of active angel investors who invest billions of pounds every year taking investment risk with each investment that they make. Though the investment can be very lucrative, the investment risk is also very great. 

Here are some of the factors that increase the investment risk. 

Failure Of Many Business Ventures

Angel investors keep looking for ventures that become the next big thing. If an angel investor backs a venture which can fast become a profitable company, the investor can become very wealthy due to the large returns. However, the reality is that many of these ventures fail within the first five years of their coming into being. With the failing of these ventures, the money of the investors also fails. For certain kinds of businesses, like restaurants, the percentage of loss is especially high. A lot of businesses also fail because even though they get the seed money from the investors, they are unable to get a second round of financing. This means that in the second round, the money which they require to expand their businesses is not as easily available.

Stakes In These Businesses Are Tough To Sell

Another great investment risk is that even though an investor may have stock in a company, it cannot be publicly traded to minimize losses. People, who make investments by buying stock in publicly traded companies, can sell their stock at will, making these stocks a liquid investment. The same is not true in case of angels. They cannot sell their stakes in any public market and therefore have to bear the losses alone. This is one of the reasons why investors usually prefer making investments in business of which they have some experience. 

Holding on to the stock of a new company, which might not be doing so well, without panicking, requires a lot of patience on the part of the investor. To be able to have so much patience, it is important that the investor invests only that kind of money which is not immediately needed and which can bear the investment risk without affecting the living expenses of the investor for several years. 

Being an angel investor

Though there are a lot of advantages of being an angel investor, the investment risk and the expensive nature of investment can often deter the investors from investing. The expensive nature of being an angel investor, only attracts those individuals who have high personal net worth. Smaller angels tend to join accredited groups or networks where they can invest in a shared sum.

Investments may take a lot of time to show profits

Any investment takes time to bear fruit. However, most investment options come with professional managers who can manage the fund for the investors. Unfortunately, this is not the same in the case of angel investing. While in other investment options, the investor does not have to bother too much about their investment, angel investments need to be monitored regularly. The angels have to regularly go through the annual reports and may make personal checks to ensure that the business is on the right track. It can also be some time before the business starts making profits. This means that an investor may have to wait for about 5-7 years before the investment realizes any profits. This is another investment risk that can deter many people from investing in such ventures. 

It is easy to get carried away

Traditionally, angels have been known to invest in businesses of people they are familiar with. This means that the angels can get carried away by the promises of the people they are close to. Some investors, who are extremely excited about the prospect of earning a lot of money, may get carried away and ignore the pitfalls of a business plan which has been presented in a manner that makes it appear extremely profitable. While it is the mandate of an entrepreneur to sell their idea to an investor, it is equally important for an investor to understand and consider the proposal very carefully before putting in their own hard earned money. To reduce investment risk, the investor should ideally analyze the business plan very carefully, checking whether the people presenting the plan have some aptitude of management. This can often cost time, but this time is spent well if the business venture turns profitable. Ideally, the investor should also seek professional help to get inputs on the potential of the business plan.