Angel Investing: Big Risk, Big Rewards if you have the money and the friends

As a recent college graduate with my own financial issues, I've had a lot of time to think about the way that money exchanges hands. I've learned about the different financial instruments available to the average person, from the different tax sheltered retirement vehicles, tax credits and deductions for business owners, employees, students and families, and evena number of different securities.

I am always looking to learn more, and not too long ago I came across the phenomenon of Venture Capital, and more specifically investing clubs for venture capital.

The ideas behind angel investment, or venture capital, are reasonable. These days, businesses can undergo meteoric growth within a relatively short period of time, and an early investment in a successful company like Reddit, Youtube, PayPal or Google can pay back well over 300x the initial sum within only a few years.

The problem with venture capital, however, is that it is extremely risky. Companies might like to be the next Google, but there are hundreds of thousands of websites and web based businesses and entrepreneurs that are making peanuts, or losing money every year on hosting fees.

So, much like any savvy investor, these venture capitalists have decided to diversify their investments. Instead of spending $500,000 on a single company to boost it into a profitable position and prepare it for an IPO where you stand to make nothing, or $60 million, these investors find 9 like minded individuals to each contribute $50,000, and each get their share of $6 million. And they will be able to invest in 10 companies instead of just 1.

While the risk may not be reduced in each individual case, the investor will not be broken by the failure of a single business, but rather by the failure of all 10 of the businesses.

For more information, please consult the following:

http://www.angel-investor-clubs.com/

http://www.cbeid.org/Angel%20InvestmentClubsSummary.pdf

http://www.seattlepi.com/business/article/Inside-Entrepreneurship-Angel-investment-clubs-1265773.php

http://www.angelcapitalassociation.org/