Tips for entrepreneurs investing in the next big thing

2. Angel investors

The entrepreneur

Angel investors provide capital investment in very early-stage start-ups in exchange for equity.

According to Widner, there are more opportunities than ever in this space. “There’s never been a better time. A lot of angel groups have formed [over the past few years] and there are many examples of people getting together and pooling their money to make single investments.”

The type of businesses to attract angel funding can vary considerably – from artisan bakeries to superannuation. However, most will have a high-growth component, Widner says. Indeed, more often than not, they’ll be a biotech or technology business.

The investor

A large number of active angel investors are successful business owners or people who have recently exited a business, Widner says. “We’re seeing a lot of the SME [small and medium-sized enterprise] business owners out there becoming angels and getting quite interested in this space.”

They don’t do it for the returns, however. “It’s a high-risk asset and if it works well, the returns are great. But the value for most angels is in working with entrepreneurs,” Widner explains. “A lot of them are entrepreneurs themselves. They got their wealth through entrepreneurship, so they love being around entrepreneurs, they love being part of the journey.” For most, she adds, it’s a hobby.

The amount invested can vary, but it doesn’t have to be in the hundreds of thousands.

“We see a lot of people investing $25,000 because they’re interested in the company.”

3. Venture funding

The entrepreneur

Venture funding is all about financing start-up or emerging businesses that are considered to have long-term growth potential. While still small, it’s growing in Australia.

“Venture funding has grown almost 15-fold in Australia since 2011 and there are several funds well over $100 million that have been formed in the past couple of years,” Widner says.

That doesn’t mean it’s a sure thing for your up-and-coming business, however. In reality, only a handful of small businesses are venture funded each year in Australia.

To date, it remains the preserve of high-growth businesses.

“Venture has to go for really big returns,” Widner explains. “That usually means technology companies that can’t raise debt because they’re not going to be profitable for a long time.”

The investor

Venture funding may not be the place for regular investors, either. Nevertheless, opportunities are appearing for high-net-worth individuals. There’s an interest there, Widner confirms, and it may be that, with time, Australia will get closer to the United States in this respect.

“In the venture fund I worked for in the US, even if 75 per cent of our capital came from institutions, most of our investors were individuals.”

Again, for these individuals it was the venture space rather than the promise of huge returns that was the attraction.

“They liked being in this asset class. It was really interesting for them to see how we invested and to meet with the entrepreneurs.”

Buyer beware

NAB Ventures General Partner Melissa Widner emphasises that while investing directly in a start-up or early-stage venture can be very rewarding, it’s a high-risk game, and its attendant risks cannot be overstated.

As NAB Private Customer Executive Jason Murray points out, if investors are keen to diversify their portfolios, they could invest in exchange traded funds instead. They’re listed funds that give you indirect exposure to a whole raft of assets, from international technology-related shares to currencies and commodities.

Important differences

It’s worth noting that crowd-sourced funding of shares is not the same thing as the donation-based crowd funding. Donation based crowd funding is typically used by artists or entrepreneurs to raise money for one-off projects. Those are donations only, with no equity element.