Angel Investing: Everything You Need to Know
6.25 MIN READ
Angel investing presents a unique opportunity for individuals who want to be involved with startups and early-stage businesses.
Companies now prefer angel investors instead of other investment channels because they are more flexible, willing to help, and less demanding. However, with increasing levels of participation comes a need for greater levels of understanding.
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What Is an Angel Investor?
Angel investors, not to be confused with venture capitalists, are typically private investors and wealthy individuals who invest their own money in startups. Angel investing, or angel financing, is lending money to startups and small business professionals deemed to have growth potential.
Investors in startup companies often look for companies with high growth potential but little access to traditional capital markets due to their size or stage of development. Most angel investors seek a significantly positive return on investment (ROI) over a stipulated period.
Angel Investing History
Initially, the term angel referenced wealthy individuals who provided financial backing for Broadway shows. Professor and founder of the Center for Venture Research, William Wetzel, gets credit for coining the phrase “angel investor.”
He published a study about early-stage investing in 1978. According to his research, they are affluent investors who provide startup funding and invest in small businesses.
Become an Angel Investor
Becoming an angel investor requires an opportunity that matches your skills and interests. So let’s look at how you can find a good match for yourself.
Who Can Be an Angel Investor
Angel investor refers to anyone who invests in early-stage ventures. Many angel investors tend to be experienced business people who understand startup environments and can help guide entrepreneurs through their early stages, business ideas, and first round of funding- referred to as seed funding.
This is not to be confused with venture capitalists who don't typically invest in start-up companies.
There are no formalized rules or stringent guidelines for an angel funder. Your initial investment amount will vary depending on what kind of deal you’re looking at and how much money you have.
How to Get Started
Angel investors provide an opportunity for businesses in the startup phase in need of funding. As an angel investor, you’re investing in the person and not just the dream. Therefore, the founding team plays a vital role in determining whether or not your investment will be successful.
Before investing, you must take time to get to know the founders well enough that you feel comfortable with their ability to execute their vision. If they’ve already created something of value, even if it’s only a prototype, that’s always a good sign.
You’ll want to look for companies with a significant market opportunity and a clear path toward monetization. You can often determine this by looking at how much traction they have already received from customers.
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Finding Startups to Invest In
There are a few ways to find startups to invest in. One of the notable ways is to attend in-person professional networking events, such as business conferences and industry meetups, as they are significant for connecting with other investors. Fundamentally, if you’re interested in investing your own money in a startup, keep your eyes and ears open.
Net Worth vs. Investment Amount
Angel investors need enough capital for investment and can use it as seed capital for startups they believe in. Angel investing thus requires a high net worth since most angels don’t have access to institutional funding like venture capital firms do.
The typical investment amount is usually $25,000 - $100,000 per deal, but it varies depending on how much capital is needed and how many people will participate.
Consider the Risks
It’s easy to fall in love with an idea and become emotionally attached. In such a case, it is best to slow down and think through your decision carefully before writing that check.
Investing small amounts allows you to build relationships with entrepreneurs while maintaining flexibility. It also allows you to test different ideas without risking too much capital, which is critical when starting.
Finally, remember that even if your first few investments don’t work out, there’s no reason to give up. Learning from failure is part of every entrepreneur’s journey, and each failure brings us one step closer to success.
Where to Look
Look for promising new businesses getting traction on social media or trade publications. Online networking platforms like LinkedIn can be helpful when it comes to making connections with people who might have access to startups looking for funding.
Characteristics of a Good Startup to Invest In
Startups are complicated, they come with huge risks, and they can be incredibly time-consuming. So if you’re an angel investor, it’s crucial that you only invest in businesses that have a good business plan and a high chance of succeeding. Some common characteristics include:
- Personality - You want passionate founders with personality traits like persistence, grit, and tenacity.
- Consistency - Your team should have relevant experience with your industry, a track record of success, and can show character in their work.
- Market potential - There needs to be potential for your company’s products or services to scale across multiple markets.
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Angel Investing Pros
The benefits of angel investing include:
- Meeting interesting people with fascinating ideas.
- Learning about various industries.
- Doing good to support small businesses.
If you have money to invest in new companies, it can be an excellent way to diversify your portfolio and make more money by helping others succeed. You might even find that you enjoy being a part of building something from scratch and watching it grow.
Angel Investing Cons
It’s important to weigh both sides of that equation. The disadvantages include:
- A lack of liquidity
- Because there are no guarantees for startups or business ventures in general, you may lose your money entirely if things don’t work out as planned.
- Many startup companies aren’t profitable until later on in their development stages.
Angel Investing FAQ
Let’s look at the most frequently asked questions on angel investing.
How Do Angel Investors Fund Their Investments?
Angel investors are typically high-net-worth individuals who use their own money to fund startups. In some cases, angel investors will pool their money together to make larger investments, but a single investor will be responsible for funding a company for most angel investments.
Can Anyone Become an Angel Investor?
The Securities and Exchange Commission (SEC) considers angel investors accredited investors with a net worth of at least $1 million (not including primary residence) or an annual income of at least $200,000 every two consecutive years.
Is Angel Investing Profitable?
Angel investing can be very lucrative, especially if you can find diamonds in the rough and turn them into profitable investments. However, you need to be aware of many risks associated with angel investing before jumping in headfirst.
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The Bottom Line
There are many benefits and risks when it comes to any form of investing, including angel investing. Do your due diligence when researching or finding startups that you want to be involved with, and be patient. You’ll meet interesting people and play a part in an exciting new idea, but also be prepared not to see a return on that investment immediately, if at all.