1 min read The Cost of Angel Investing: Where are the Fees?
I recently read a discussion forum in which the post’s author had bought a financial instrument and later discovered that the investment advisor who sold it to him actually made a commission on the sale.
The author was incensed that someone had made a commission off of selling him something, and to top it off, the investment advisor didn’t disclose his commission.
As I read the post, I began to wonder where this guy has been for the last 50 years. Of course people make money selling things, and financial instruments are no different.
Where are the Fees?
When I sit in pitches from investment advisors promoting their fund, or whatever their financial instrument may be, the first question that nearly always comes up from the audience is how much are the fees and commissions.
This number ranges from a fraction of a percent for mutual funds to double-digit percentages in private equity.
After reading the aforementioned post, I began to wonder about the cost of angel investing. Where are the fees?
In a member-managed group such as the Baylor Angel Network or the Beyond Angel Network, there is a membership fee, but the members review the deals, perform the due diligence and ultimately decide what to invest in individually.
The Main Cost Comes in Three Areas:
The main cost comes in three areas, and while those costs aren’t paid directly by the angel investor, the business pays the costs, and ultimately the angel investor takes a reduced return based on those costs. So an experienced angel should ask about these costs.
The first cost is the Management Salaries. Management salaries are kept low in the early days of a company to give the business every chance of succeeding.
I was recently in a deal in which the members asked about the CEO’s salary. He replied it was $300K per year. You could feel the air leaking out of the room. While he was a strong manager, there was no way the business would survive paying salaries of that magnitude.
The second cost is that of Consultants, whether they are on the board or as advisors.
It’s fair to ask who is getting paid and how much for the work they are providing. There are good consultants out there, but I’m often amazed at how vague their duties are.
Oftentimes I hear generalizations such as “they are going to help us,” but there’s no job description, no metrics, no deadlines, and it’s all very nebulous.
The third cost and what I consider the most important is the Angel Investor’s Time. If the deal requires a day a month or, worse, a day each week, then the deal must be spectacular to make it worthwhile.
The angel investor should figure out upfront what value he can add and if the business runs into trouble, which will help them. Thus, the angel investor’s time becomes the key factor in calculating the cost of angel investing.
Read more about the TEN Capital Network for Investors: https://www.startupfundingespresso.com/investor-landing/
Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group
