Similar to other investment options, an investment in a private company can produce annuity type income. When starting out as an angel investor an investor should plan on making multiple investments with diversification of industry and structure as a core principal. Accredited investors with sufficient liquid capital to make multiple strategic investments over a period of time, will likely diversify their portfolio of private equity stock investments to include multiple types of investment structures. Similarly to an investor looking to get involved in real estate investments with different targeted outcomes; short term return (flip), revenue producing (rental), and long term (raw land). An angel investor should seek to diversify into multiple types of offerings: debenture with option to convert (flip); royalty or revenue cycle financing (rental); and traditional equity (raw land).
In this episode of the Compassionate Capitalist Radio Broadcast (REPLAY) http://www.blogtalkradio.com/karen-rands/2014/03/25/earning-an-annuity-as-an-angel-investor Karen Rands shares her insight into the different types of angel investments and specifically how to identify private alternative investment opportunities that can produce a re-occurring revenue stream.
The conventional wisdom for angel investing is similar to venture capital investing— invest in 10 companies, wait 5-10 years to discover which one or two of the lot produced a big enough return on the investment to make up for the 4 that lost all of the investment and the 2 that broke even and the 2 others that gave you just a teeny return. It doesn’t have to be that way. When wealth men and women apply the same discipline they have learned when managing their public stock decisions and their real estate investment choices, and seek to have a long term strategy that calls for diversification of industry and investment type, they increase their odds of a higher rate of return because they have balance and load.
Diversifying by industry and into market areas that an investor already has an interest ensures some level of insulation from the natural economic ebb and flow industries experience. Diversifying by product / investment type allows for shorter term results off set by long term hold. For example, an investor just starting out could “loan” money as an investment secured against orders with the option to convert or to have it paid back but with warrants, then they get their money back, but have an option for discounted equity. After a couple of those types of investments, they begin to accumulate additional liquid capital that could be invested in to an offer for royalty or revenue cycle financing. This is a type of investment that is made but instead of an equity stake, the investor received a re-occurring revenue stream as a % of revenue until an agreed to multiple on the investment is paid back, usually 4X the investment. Companies with the potential for long term growth and opportunity to go public are ideal for equity investments where the investor will have their investment capital tied up and illiquid for 5-8 years. This type of equity investment is the most risky, because a lot can happen in 8 years to cause a company to not succeed, but if they do, then the results can be 10X to even 25X return on investment. Early investors in Microsoft, eBay, Amazon and many others all experienced this type of return. Keep in mind though… for every one of those, there are at least 10 that never got that far and never gave a return on investment. There are some, like the companies that went public with a big splash… Web Van, even Facebook, that did not hold its value after going public, but the initial angel investors made their money back and them some, probably at least 5X if they sold when it first went public.
You have an opportunity to get more information on this type of diversification by listening to the podcast or buying the Inside Secrets of Angel Investing. This is the topic discussed in detail in Chapter 5. You can also sign up for free excerpts from the ebook, Inside Secrets to Angel Investing.
Are you an investor that is tired of the volatility and unpredictability of the stock market? Are you frustrated that you have little influence to affect the management or operation of that public company? Have you realized that the public stock market is actually pretty risky and the overall return on investment isn’t that great? The Join the New National Network of Angel Investors and be a part of the growing community of wealth men and women that want to master their wealth portfolio and learn how to be Compassionate Capitalists – make money and contribute to the economy at the same time.