Angel Investing Described as a “Low ROI” Investment

Posted in Tips

In the modern business world, angel investing is often seen as one of the primary ways to attract funding for a small business. But according to recent studies, the people who put up this capital are not often getting even a modest gain for their efforts. Researchers have estimated that up to 39% of angel investors don’t even get a positive return on investment, meaning they end up losing money.

Why Angel Investing Might Be Suffering

A number of finance pros have put forward some explanations for the troubling phenomena of negative return on investment for those who hand business startups seed money. One explanation is that the 2008 financial crisis delayed the kinds of payoffs investors were expecting from their small business beneficiaries: some cite low incidences of IPOs, and long paths toward solvency for businesses that were well-positioned before the bust.

Some also suggest that angel investors might have a liquidity problem. Because these individuals are often investing with their own money, they may not have the flexibility of, say, a hedge fund manager. That might mean money ends up being tied up for a long time without substantial gains, not unlike some other kinds of investments, including stocks and ETFs that haven’t performed as their holders may have expected.

Risky Angel Investing in Your Small Business

When you go looking for money from an individual venture capitalist or angel investor, you don’t want to point out the alarming number of situations where financial backers lose money. However, there is one way that your business pitch could benefit from this negative statistic: implicitly. If you assume that angel investors read up on finance and understand the current business climate, then you know that they’re looking for businesses offering as much of a guarantee on positive ROI as possible. That’s where your strategy comes in: use factual research and accurate scenarios to show how you will make money for your investors, including simple strategies like these:

• Identifying your local and immediate competition and showing any applicable market research indicating your chances of grabbing market share
• Presenting a business plan that contains “nuts and bolts” showing how you will tackle challenges
• Letting investors into how you would handle a “backup plan” for any sales strategies that might seem to imply subjective results

These are just a few of the concrete ways that quick-thinking entrepreneurs are developing their elevator pitches around the current risk climate. Show your investors more, and they may be more inclined to cash in, since the field of eligible candidates with legitimate predictions of a yield may have thinned out somewhat in the last few years. The bottom line is that, in a weak economy, your confidence could end up being one of your best assets for continued small-business funding.

Top of page