If you’re not investing in startups RIGHT NOW… you must not like the idea of big returns in the coming years.
You see, there’s been a major shift in the world of Angel Investing space and it’s created HUGE opportunities…
And given the upper hand back to the investor.
For years, it was ridiculously easy for startups to get funding from large venture capital firms.
That’s not the case anymore.
Things have been shaken up with COVID-19 concerns, startups may find it more difficult to raise cash.
YOU now have the upper hand.
5 Things You Need to Know as an Angel Investor Right Now
With all that’s going on in the world right now, there’s a general feeling of uncertainty. Investors are reevaluating their portfolios and loads of equity have been placed on hold.
The angel investing space isn’t immune to the global lockdown. There has been a major shift here.
But, while many point to the challenges this brings, there is an equally substantial opportunity here. An opportunity that gives investors the upper hand.
To help you capitalize on new opportunities and avoid new pitfalls, we boiled matters down to 5 essential things angel investors need to know right now.
1. Is Investing in Startups Dead?
Short answer — no.
Investing in startups is alive and well, but the rules have changed. Your strategy and mindset as an investor must adapt to the crisis if you want to succeed.
The first thing to remind yourself is that the economy will get better.
Angel investing is betting on the future. The goal is to make investments that work with the current forecasts for recovery. Invest for medium- to long-term growth.
There is a shift in favor of deal terms to investors. Valuations are better. Startups aren’t able to negotiate for the best deals like they were a year ago. They’re adapting to the current economic climate.
Why? Cash is in high demand for startups. Venture capital firms are struggling. Founders are looking for anyways to raise funds and are making compromises to do it.
2. How Does This Volatile Market Affect Startups?
Startups are being negatively affected because many sources of funding have dried up. Also, some startups were more prepared for a rainy day than others. This scenario will act as a filtering mechanism for startups.
As the world goes into lock-down mode and social distancing becomes the new norm, buying behaviors will change dramatically. All industries will be affected, but a few will be hit harder than others. Startups that are making non-essential products/services will surely see a pullback.
The social implications of this crisis will also have an effect.
Restaurants, hospitality, tourism, and much of the sharing economy will be forced to retract, restructure, and rethink. It’s best to avoid anything in these verticals for a while.
The Silver Lining
Good news, there are still startups disrupting the status quo and pushing for efficiency.
As history shows us, disrupters that get adopted are well-positioned to prosper. A remarkable number of success stories always seem to come out of big financial crises.
For example, Apple and Microsoft were born from the 1970s recession and Airbnb and Uber from the global financial crisis of the late 2000s.
There were many winners of the last recession.
Groupon saw the opportunity to offer people their non-essential luxuries at a discount when money was tight. Netflix capitalized on the decline of video rental. Countless fintech startups offered an alternative to the traditional institutions that failed us.
Startups that capitalize on changes in markets and society always ride the major boom that follows the bust.
3. What Should You Look For in Deals Right Now?
The essentials for assessing a deal remain. But, there are some new red flags to look out for and new benefits to be aware of. You need to do things a bit differently if you want long-term growth and a big ROI.
Know the Burn Rate
Knowing how much a startup is spending is more important than ever. This will show you how equipped the founders are to ride out the storm.
The business should have realistic ideas on growth. Maybe last year’s plans are put firmly on hold and adaptation comes before expansion. Hopefully, the founders already have a convincing plan for restructuring and reducing their burn rate.
However, a startup in fintech that needs to pump out innovative solutions ASAP can justify burning through some cash. It depends on the product/service and the sector.
Ask yourself, can the team adapt to deal with the crisis, using smart working and lean strategies to improve their long-term success?
Find the Right Sector
Your safest bet right now is on essential industries. Innovations of things we can’t live without are crisis-proof.
For now, be skeptical of flashy products that rely on heaps of disposable income. Most people are changing their spending habits and are prioritizing basics first.
Startups that alleviate or solve current problems are great. Startups that work with the changing culture are also great.
Extra points to anything that serves social distancing. Extra extra points to anything that enables social connection despite social distancing.
In certain cases, you can even find a startup that’s so revolutionary or so solid that it doesn’t matter what’s going on, you just know it will be a long-term success.
Expect anything in online education, delivery services, e-pharmacies, gaming, and streaming to stay strong and maintain pace through the current landscape.
Get Deals You Couldn’t Normally
A crisis is the only time investors will be able to pull unreasonably favorable deals.
Just like trading stocks, buy low, sell high.
Right now, incredible ideas with strong teams are desperate for cash and will give you the opportunity of a lifetime. You just need to know where the good deals are.
Find Solid Founders
In difficult times, sometimes the ideas don’t mean as much. What will shape the success of your investment is the team behind it.
Experienced founders are doubly important right now.
Most startups will need to play a slow, meticulous game to get out of the mess we’re in. One mistake can cost the whole operation.
Be very observant of founders. Look at their background, see what they say, talk to them if you can.
Pick the Right Location
There is more faith in advanced economies’ ability to cope and recover. But, developing economies are more desperate for capital.
The IMF’s Managing Director, Kristalina Georgieva, had this to say about emerging markets:
“They are badly affected by outward capital flows, and domestic activity will be severely impacted as countries respond to the epidemic. Investors have already removed US $83 billion from emerging markets since the beginning of the crisis, the largest capital outflow ever recorded.”
This will inevitably hamstring startups across the globe. The weak ones will fail and the strong will be left without investors. This is where a savvy angel investor can swoop in.
Angels who look towards these markets while everyone else looks away will find spectacular companies with very favorable valuations.
4. How and When Will I Get My Investment Back?
Remind yourself, this is a long-term strategy.
If you have invested in strong startups, this crisis will just delay things. Real innovation pushed by good teams won’t crumble under this pressure.
In general, your return will depend on the strategy of the startup. What was their original plan for an exit? You can look to the history of similar exits in the same verticals.
With some good startups in deep water, we could see an increase in exits via acquisitions from large corporations.
Things played out like this throughout the recession of the 2000s.
JPMorgan acquired Bear Stearns and Washington Mutual for a fraction of their value from just a few months before. Today, we will likely see big tech companies taking the initiative and snatch up intellectual property bargains left and right.
Big players who know they can weather the storm won’t let this opportunity slip by, and neither should you.
ROI and Predictions About COVID-19
Coming back to IMF manager Kristalina Georgieva, we have some predictions about what to expect from the economy in general.
“First, the outlook for global growth: for 2020 it is negative—a recession at least as bad as during the global financial crisis or worse. But we expect recovery in 2021 . . . The economic impact is and will be severe, but the faster the virus stops, the quicker and stronger the recovery will be.”
With this in mind, you can make investments or adjustments to your portfolio accordingly. As news comes in about containment and recovery, you can gradually upgrade your confidence level.
Remember, in 2021 we will all be singing a different tune. Those who get in on great deals today will be sailing smoothly when they catch the first winds of recovery.
5. What’s the #1 Factor That Can Make an Angel Sink or Swim Right Now?
For angel investors trying to persevere and prosper with the current forecast, nothing is more important than deal flow.
The incentives are big. We have extreme valuation discounts. Startups are innovating to make the situation better. Disruptors that come out of this crisis can be huge.
But, if you don’t have access to exceptional deals or don’t know how to find them, your odds aren’t great. The game just became more difficult.
First, experienced investors are a wealth of information. If you can learn from one, don’t miss that opportunity. Next, joining a community of like-minded investors can give you inspiration, motivation, and education. Finally, deal recommendations of up-and-coming startups can place incredible opportunities right in your hands.
The one resource on the market that does all of these things is Angel Investing Insider. My team and I made this package extensive and affordable to expand the angel investing world.
Entry into this space has been difficult for many, but we aim to break down those barriers. This benefits startups and investors alike.
What do you think? Leave us feedback in the comments!