Four myths about angel investment

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Paul Clark

If your impressions about angel investing come from ABC’s “Shark Tank,” you might believe that in order to fund early-stage companies you need to be a self-made billionaire tycoon, a real estate magnate, an owner of an NBA team or a homeowner who hosts Mick Jagger and other stars at their pads.

In fact, this is one of a few common myths about angel investing. 

Myth 1: Angels are rare and unusual creatures.

Reality: Outside of TV’s sharks, angels are more numerous than you might think, and each invests much less capital than you might expect.

To be an angel, you need to be an accredited investor, defined by the Securities and Exchange Commission as having $1 million of net worth outside of your primary residence, or annual income over $200,000 for individuals or $300,000 for couples. There is no requirement to own a professional sports franchise, or even to pass an exam. The national Angel Capital Association estimates more than 4 million people in the U.S. are accredited by wealth, with around 120,000 in South Carolina alone.

 

Myth 2: You need to invest a lot to be an effective angel.

Reality: Again, not true — you don’t need millions of liquid capital to generate positive returns from early-stage companies. Consider the investments made by angels in VentureSouth groups like UCAN in Greenville, Electric City Angels in Anderson and Spartanburg Angels. There is never any obligation to invest anything in our groups, but the minimum investment is only $5,000.

This is sensible, as angel investment is risky: Most single investments lose some money. It is only through a diverse portfolio of “many small bets” that, on average, angel investing becomes an attractive financial investment. Assuming 10 investments at $5,000 each, you can create a diversified portfolio of angel investments for a total investment of $50,000. Not millions.

An even more efficient mechanism to make “small bets” is a “sidecar fund,” like our Palmetto Angel Fund. The minimum commitment was $25,000, which was invested in 18 investments over 2.5 years — an exposure for an investor of $1,389 per investment — an extremely efficient way to spread investments.

 

Myth 3: Building up a portfolio takes a long time.

Reality: In many areas — including the Upstate until only fairly recently — this is probably true. But at VentureSouth today, we have 13 different open investment opportunities — from new plans we are funding and existing companies that are raising additional capital to accelerate their growth. So if you joined today, you could have a diversified investment portfolio before you finish your holiday shopping.

 

Myth 4: You need to know lots about angel investing before you jump in.

Reality: Again, false. Just less than one-third of the members that join our groups tell us that they have been angel investors before — meaning the majority of our members are becoming angels for the first time. But neither is thrown in the deep end when you join. Combining the comprehensive educational materials and information tools we provide with the knowledge of the experienced members (who have been angel investors for an average of seven years) helps you make well-informed and prudent investments.

So if you’ve assumed the myths of angel investing, perhaps 2017 is a good time to change the channel from “Shark Tank” to “Mythbusters.”

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