Statistically, it could be seen as a blind leap of faith.
At least half the companies invested in will fail, or their rate of return will be less than the investment, but according to Bill Payne, one of the leading angel investors in the United States, such investments require an unusual mix of assessing personalities, product quality and potential, and the market.
For him, there is the thrill of the hunt, the enjoyment of working with entrepreneurs, being able to continue in business without the stress and demands of the daily running of a company, and of helping communities.
Mr Payne (67) has, for 30 years, been an angel investor in more than 50 companies; someone who invests their personal funds in start-up businesses earlier in the company's life than a venture capitalist.
"I like being engaged with entrepreneurs.
"I am a real advocate of the so-called entrepreneurship economy, meaning I think entrepreneurs have a substantial impact on job and wealth creation."
It was a perfect retirement fit for the former engineer who, in 1971, co-founded Solid State Dielectrics, which manufactures dielectric powders for ceramic capacitors.
He sold the company to DuPont in 1982 and it now generates annual revenues estimated at $US20 million ($NZ29 million).
Mr Payne, who is visiting New Zealand as BNZ University of Auckland Business School entrepreneur-in-residence, was in Dunedin this week meeting entrepreneurs and officials at the Upstart business incubator which, along with the economic development unit of the Dunedin City Council, hosted his two-day visit.
He was impressed by the calibre of New Zealand entrepreneurs, their ideas and the support they received from angel investors, saying it was comparable with angel activity in one of the most active US centres with a similar population to New Zealand: Boston.
Mr Payne said New Zealand businesses, unlike start-up companies in the US, had the added challenge of a relatively small domestic market which required them to consider exporting from an earlier stage.
But that did not change the fundamental criteria on which angel investors based their decisions, which had more to do with the entrepreneur and their management team than their product.
He said a top-quality management team could turn a mediocre product into a top product but equally, mediocre-quality management could turn a top-quality product into a mediocre one.
"Execution is what it is all about, finding the entrepreneur and management team that can executive against a business plan."
There were caveats, such as being side-swiped by external factors such as a hurricane, or a dominant competitor taking over the space being targeted by a start-up company.
But in general, Mr Payne said businesses did not fail because of a lack of capital, but because of poor-quality management.
Mr Payne said when considering an investment he looked at the integrity of the entrepreneur, their understanding of the business segment, their willingness to be coached, their passion for what they were doing and the potential for the business to grow.
Equally, he would want to work with an entrepreneur who knew their limits, when to step aside when the size of the business exceeded their capabilities.
The stakes were high and angel investors did not like surprises.
Five out of 10 companies would fail or give a return on investment that was less than the initial investment, while four of the five companies that survived would have a low rate of return.
"All the upside comes from 10% to 12% of companies," he said.
"It's a very, very high-risk investment with very skewed returns."
To compensate, angel investors tended to diversify the type and number of investments, but still only invested in between 2% and 5% of the opportunities with which they were presented.
"The odds are if you have 15 investments, you'll get a reasonable return.
"If you invest in two, you are less likely to see any return on your investments."
The rewards could be great, and Mr Payne said he used proceeds from earlier successful investments to fund his activities.
One such investment was a personnel-placement company that specialised in placing part-time physicians.
Mr Payne said the business had a niche position, and the entrepreneurs and staff were skilled and knew their market.
In 15 years, revenue grew from nothing to $US50 million before it was sold.
Angel investors were not new, but until recently had kept under the radar.
In 1890, the Carnegie family and J. P. Morgan financed Thomas Edison to form General Electric, but Mr Payne said most angel investors kept out of the public eye because of constant demands from people seeking backing.
That has changed through the formal creation of angel investment groups.
In 1994, the US had 10 such groups but now it had 300, which last year invested close to $US20 billion in 50,000 companies.
Of those companies, 40% received first-time investments and the rest were subsequent investments.
New Zealand had about 15 angel investing groups, which last year invested $50 million in 63 companies.
Angel investing was a passion for a man who has published several business books and received a multitude of awards and recognition for his work.
But the passion of working with entrepreneurs, seeing an idea succeed financially, and tapping into the passion a developer had for a product still burned fiercely, he said.
And, of course, he still had time for fishing and the occasional game of golf.
Bill Payne (67)
• Graduated from the University of Illinois (Urbana) with bachelor of science (1963) and master of science (1964) degrees in ceramic engineering (materials science).
• Is now entrepreneur, angel investor and educator.
• Started Solid State Dielectrics in 1971, and sold it to DuPont in 1982.
• Since invested as an angel in more than 50 start-up companies.
• Served as an entrepreneur-in-residence to the Kauffman Foundation.
• Has taught more than 80 workshops and seminars on angel investing in five countries.
• Assisted in the founding of four angel groups in the United States.
• Is BNZ University of Auckland Business School entrepreneur-in-residence.
