Angel Investing: What’s so attractive about it

December 07, 2017 09:02
As an asset class, angel investment’s most standout feature is high risk and high return. Photo via slopjop, CC License

Angel Investment is becoming increasingly noticeable in Hong Kong in recent years. But how many among readers of the Hong Kong Economic Journal are angel investors? How many can claim to have insight into angel investing? The answer seems likely to be in the small minority.

Angel Investment refers to early stage investment in startup companies. From an investment perspective, it should be regarded as a distinctive asset class, with attributes quite different from other more familiar asset classes such as real estate, stocks, bonds, mutual funds, foreign currencies and so on.

As an asset class, angel investment’s most standout feature is high risk and high return. Startups have notoriously high mortality rates; so even among companies that have obtained angel financing, barely two or three out of 10 may still be in business in two or three years’ time. In most cases, your investment will be completely wiped out. On the other hand, a very small minority may emerge to bring their investors returns that are tenfold, several tenfold or even at or over 100 times.

The above characteristic aside, angel investment has quite a few additional attributes to keep many of those who have had a taste of it coming back for more.

As target companies are mostly, if not all, technology and innovation driven ones, angel investors are always in touch with the forefronts of technology and innovation, and can stand high and see farther ahead the trends. That alone may make the endeavor worthwhile.

Angel investors may fine-tune their roles and adjust the degree of their participation in the entrepreneurial process. If you are too busy, you may play a more passive role, but say if you are semi-retired, without too much time constraint, then you may want to become an active angel.

As an angel, you can step out of your usual, day-to-day job and vicariously engage in another walk or industry. You can test your judgment and add value to your investee companies. Here, the sense of satisfaction you can get will be unparalleled compared to most other investment categories.

If you participate in angel investment activities in a group context, you will have the opportunity to exchange views, learn mutually, and pool complementary knowledge and skills with fellow investors. As you turn the investment process into efforts to broaden your horizons, enhance your sensitivity to ongoing trends, and develop insights as to how a company prospers or fails, you will be constantly adding knowledge and value to yourself.

To be successful in angel investment, one needs to pick up certain requisite knowledge and skills. We will elaborate on these in this column going forward.

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Partner of Nixon Peabody CWL; Director and Legal Advisor, AAMA PRD Chapter; author of Angel Financing In Asia Pacific – a Guidebook for Investors and Entrepreneurs