The International Money Fund predicts a gloomy economic outlook in the coming months. The organization cites causes including high inflation rates, weak growth in major markets, and the disruption of supply chains due to the ongoing invasion of Ukraine. The global economy is likely headed into a recession.
But this news doesn’t have to spell doom for angel investors. In fact, an economic downturn can prove lucrative. There is less competition from traditional lenders and venture capitalists, startups are eager to close deals, and consumers are hungry for novel solutions to everyday issues. It may seem counterintuitive to invest right now, but many companies that are household names got their start during the 2008-09 recession — including Airbnb, WhatsApp, Netflix, and Zoom.
Below are a few strategies for making investments during a time of economic uncertainty and a potential recession.
Stick to Your Core Values
The people who become angel investors do so because they desire to use their wealth to positively influence economic and social progress. Many focus on specific technologies, economic sectors, or causes. In recent years, angel investors have leaned into ESG investing — environmental, social, and governance-oriented investments. Supporting unique startups tackling problems like climate change or the rising cost of living is common in times of economic prosperity.
But in an economic downturn, it’s tempting to return to less risky, less socially conscious investments. Fight the urge to do so. Think instead of the long term. As an investor, how would you like your contributions to be remembered a decade from now or in 100 years?
Sticking to your core values will help you weather financial uncertainty and feel proud of the investments you made when everyone else hedged their bets.
Research. Research. Research.
Risk has been and always will be associated with angel investing. However, these risks should be as calculated as possible. Because an angel is often on the ground floor of a promising company, it’s crucial to check that the foundation is solid.
Review the profits already generated by the startups you have an eye on. Ask about their founders’ step-by-step plans. Determine how successful they are at marketing their product. And above all else, be certain they are committed to success, whether it’s with a once-in-a-lifetime product or based on a set of adaptable business practices.
Refrain from rushing into an investment solely to remain active during a downturn. Follow investment news closely, keep up to date with popular startup conferences, and ask seasoned investors for advice when necessary.
Invest in Startups Across Industry Lines
Economic experts recommend an investor support a minimum of 10 businesses at any time. This increases the chances of striking gold and decreases the likelihood of losing a lump sum to a single failed idea. Even in good times, studies suggest only 1 or 2 of those ten startups will result in positive returns for their investors. The odds get slimmer during a downturn.
That’s why it’s important to diversify an investment portfolio at (or before) the first sign of economic volatility. Be daring enough to select startups in various fields because, as the pandemic demonstrated, industries as far-ranging as healthcare and retail desperately need new ideas, technology, and products.
One way to find promising investments is to go after those vying for the greatest total addressable market (TAM). Seek out startups keen on providing in-demand solutions for consumers from every walk of life rather than those hyperfocused on niche markets.
Don’t Withdraw at the First Sign of Trouble
Companies fail when people stop believing in them. That can mean their founders, target audience, and, especially, their early financial supporters. The first ten years of any business are the most precarious, and it’s easy to confuse a bump for a permanent roadblock.
Part of being an angel investor is learning extensive patience. Since an investor is not in the driver’s seat, it is common to feel a lack of control. One way to counteract this feeling is to trust deeply in the founders of whichever startups you choose to back. It’s obvious you saw something special in them, to begin with. Try to identify that factor and remind the founder(s) of their potential.
Being able to stick it out through thick and thin in the early years will not only strengthen your chances of a positive return. It will also engender loyalty from the founders with whom you work closely. As their next piece of groundbreaking tech or revolutionary product line is launching, they’ll turn to you first, knowing you can be dependable and add-value to their enterprise.