3 Angel Investor Pain Points to Think About Before Investing

Allianse Writer

As an angel investor, there is no doubt that one of your biggest dreams is to strike it big. You do understand that investing is risky. In some estimates, 9 out of 10 startups will fail. Yet, the allure of high rewards when the company enters the stock market is too compelling. And so, your goal is to reduce the risks, and one way to do that is to know these angel investor pain points.

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What Are the Biggest Pain Points of Angel Investors?

One of the things entrepreneurs do is know how a business fails, especially one with a similar concept. Almost everyone would agree that knowing how these companies failed helps you avoid the pitfalls. But that is not the end of it.

Remember that you want to know how a business failed to see the solution. As much as you try to avoid making mistakes, it might happen. Also, many external factors beyond your control can affect your startup. The pandemic, for example, has wreaked havoc on global economies.

As an investor, you should know the pain points of angel investing. Doing so allows you can to a better decision. More importantly, you are more likely to find solutions to challenges. At the same time, it helps you better judge a startup’s future growth and becoming a successful business.

1. Angels Do Not Have Negotiating Power

Venture capitalists can write huge checks. So, when VCs invest a significant amount of money during a seed round, they have negotiating power. Call it their competitive advantage, if you will.

On the other hand, most angel investors do not have the power to negotiate. The main reason for that is because the amount of money they can put into a company is small. As a result, they find themselves in a situation where they either invest or look elsewhere.

The inability to negotiate can be frustrating, especially when you think you have found a great business idea. Far too often, the target valuation of a founder is set too high. While VCs can negotiate, most individual angels cannot.

So, what can you do?

If the founder refuses to bulge, and the valuation is excessively high, skip and find another one. In 2021 alone, there were a record 5.4 million applications for new businesses. One lost opportunity here may lead to better opportunities with other startups.

2. Angels May Invest at Higher Valuations

As noted in the previous section, one pain point of angel investing is that many startups have high target valuations. Even so, an individual might decide to invest.

But what can be incredibly annoying is finding out later that the startup agreed to a lower valuation with a VC. For instance, you invested in a company with a $10 million valuation. A VC, which could put in a considerable sum, invested money at a lower valuation of $8 million.

If you happen to invest earlier, then you took on more risk. Although there are instances in which a company upgrades an angel to the lower valuation, it does not happen often.

So, the next time you see a great investment opportunity, do not jump the gun. Among the things you need to think about is the valuation. There might be changes that allow you to invest at a lower valuation by delaying.

3. Finding an Ideal Startup Is Not Easy

One reason for the high incidence of startup failures is a flawed business plan. Of course, there are many other reasons, such as lack of funds or poor business structure. At any rate, there are also the good ones, though they are the minority.

Typically, the founders or CEOs of startups actively seek funding. In most cases, they would approach well-established investors. Here’s the catch. In the United States, one estimate showed around 300,000 individuals making an angel investment. But there could be as many as 4 million angel investors.

So, what does that mean for you?

The chances of startup founders finding you are slim. A VC, for example, may see between 1 to 2 good ones in 3 startups. But as an angel investor, you might only see 1 in 30 to 100 startups. Some angels have a worse estimate – 1 in several hundred. Getting a quality deal flow, in other words, is highly challenging.

To make it easier, many modern investors use one of the many angel platforms. Others, meanwhile, choose to use a startup investing platform like Allianse. Their reason for doing so, among many others, is that they can rely on advanced AI to match them with suitable startups.

What Other Pain Points Do Angel Investors Cite?

Apart from the listed pain points, angel investors also cite other matters that caused them grief.

1. How do you become an angel investor?

Finding information and learning how to be one is easy – or so it seems. Not everyone is tech-savvy. The tons of materials – articles, videos, and others – can confuse these individuals.

But many sites provide excellent information, such as Investopedia. So, try to check them out.

2 How do you know that a startup is what it seems to be?

Some founders are excellent communicators. They have the gift of gab and can make a compelling pitch. For obvious reasons, they show you all the reasons why you should invest in them. But as many investors have experienced, some startups have everything but substance.

So, be sure to exercise due diligence so that you can make wise investment decisions.

3. Are there ways for you to diversify even with limited funds?

Most angels can only invest a modest amount of money. While they understand the importance of diversifying the portfolio, many also get confused. For one, they are not sure how they can invest in several startups. Some of them are also unsure if they could diversify with limited funds.

One way to solve this dilemma is to determine the total amount you are willing to commit. Then, divide it by 3 to 6 investments. Knowing how much you can put into a startup makes it easier to make decisions.

4. Can you find a startup that meets your preferences?

In general, angel investors seek a company that they think would succeed. But at the same time, some also have specific choices. Furthermore, personalities may come into play. For example, it may be necessary for some investors to interact with people who share similar views and interests.

Matching with the right startups, fortunately, is easy. Simply sign up with Allianse and let them do the matching for you. But more than that, they can also offer expert advice and guidance. And by the way, remember that startups are also looking for the right investor. With this platform, they might find you before you find them.

4. How do foreigners invest in American startups?

Individuals from other countries can be potential investors in the US. In the beginning, it is pretty challenging to learn about the legalities and different nuances. They should also think about how they will pay taxes.

Nonetheless, these are pertinent information that they should know. Foreign individuals can ask people they know who invested for tips on getting started. As for reading articles online, visit only reputable sites to learn about the legalities.

Also, do not try to assimilate as much information in one go. Angel investing and other investment vehicles are complex subjects. While reading up, do it logically and take notes, too.

5. How do angel investors feel when startups do not update them?

Unfortunately, some startups do not send small investors regular updates. But they do keep large investors in the loop. For startups, a few hundred dollars may not seem much. But they do matter to angel investors. And so, they would like to feel included instead of excluded.

You can avoid this problem by discussing matters concerning updates. Ask the founder how they intend to keep you updated on their business.

Are Investor Pain Points Acceptable to You?

Being an angel investor is risky, but the rewards can be fulfilling. You want to know first what you are getting into to make wise business decisions. The pain points and questions should give you an overview of what to expect. If you can accept and work through these challenges, then go ahead. Find as many of the most promising startups as you can.

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