What is an Angel Investor?
An angel investor is an individual who invests their own money in privately-held companies, often providing seed funding to early-stage startups in the technology world. Due to the high-risk nature of these startups, banks are often hesitant to provide funding, making angel investors a vital source of risk capital. Typically, angel investors are high-net worth individuals with relevant institutional knowledge and background to the companies they invest in. In addition to capital, angel investors often provide guidance and connections to clients, employees, and other investors to the companies they invest in.
Who Can Become an Angel Investor?
Angel investors are individuals who invest in early-stage startups, providing them with the necessary capital to grow and expand. However, not everyone can become an angel investor. Due to the high-risk nature of early-stage startups, regulators have put in place certain requirements that investors must meet to be able to invest in these types of companies.
To become an angel investor, one must meet the accredited investor designation. An accredited investor is an individual who meets certain financial and knowledge-based requirements. These requirements include:
- Individual or joint net worth in excess of $1M (not including the value of a primary residence);
- Individual income in excess of $200k or joint income in excess of $300k for the two most recent years, with a reasonable expectation of reaching this level in the current year;
- Holding a Series 7, 62, or 65 license (Hustle Fund’s Angel Squad pays members’ Series 65 exam fee and offers a community support group to help people study). Note to be accredited via licensure also requires the individual to register with either the state or SEC as an Investment Advisor Representative for a Registered Investment Advisor (RIA). The RIA can be the individual’s own firm.
It is the responsibility of the startup to ensure that an investor meets accreditation standards. Only raising from accredited investors can exempt a startup from certain required legal disclosures whenever there’s a sale of stock (e.g., during a fundraising round).
What If a Non-accredited Investor Wants To Invest?
A revision to the JOBS Act in 2012 has made it possible for startups to raise up to $1M from non-accredited investors. This has led to the rise of companies like Republic, which allow retail investors to participate in startup fundraises.
In conclusion, to become an angel investor, one must meet the accredited investor designation, which requires meeting certain financial and knowledge-based requirements. While non-accredited investors can also invest in startups, they are subject to certain limitations and regulations.
How To Get Angel Investors for Your Business
There are several ways to attract angel investors for your business. Here are some tips:
- Build a strong business plan: Create a clear and comprehensive business plan that outlines your goals, strategies, and financial projections. This will help investors understand your vision and the potential for growth.
- Network: Attend industry events, conferences, and meetings to meet potential investors and build relationships. Joining business networks and associations can also help you connect with investors.
- Utilize online platforms: There are several online platforms that connect entrepreneurs with angel investors, such as AngelList, Gust, and SeedInvest. These platforms allow you to showcase your business and connect with potential investors.
- Seek referrals: Reach out to your professional network and ask for referrals to potential investors. This can help you find investors who are interested in your industry and have a track record of successful investments.
- Be prepared: Once you have identified potential investors, be prepared to pitch your business and answer any questions they may have. Have a clear understanding of your financials and be able to articulate your value proposition.
Remember, securing angel investment is a competitive process, so be persistent and don’t get discouraged if you face rejection. Keep refining your pitch and building relationships, and eventually, you will find the right investor for your business.
How to Break into VC as an Angel Investor
If you’re interested in becoming an angel investor, there are a few steps you can take to increase your chances of success. Here are some important considerations:
Learn the Risks of Angel Investing
As an angel investor, it’s important to understand the high-risk nature of early-stage startups. While it’s true that one or two successful investments can make up for losses, most angel investors are aware that they may lose all their money on a deal. Therefore, it’s important to adopt a strategy of broadly indexing, hoping to capture as many big winners in your portfolio as possible.
Develop an Investment Thesis
An investment thesis is a reasoned argument for a particular investment approach. As an angel investor, your investment thesis should be derived from your own research and understanding of the market, areas of interest, and financial situation. This should help you create a profile of the types of companies you want to invest in, including their stage, industry, location, and valuation.
To invest in a startup, you need to be offered allocation. And if you want allocation in the best deals, you have to be an investor founders want on their cap table. A lot of this comes with building up a track record over time as a value-add investor in successful startups. But when you’re just starting out as an angel investor, an effective way to overcome adverse selection and win allocation in good deals is by building and promoting a personal brand. Investors often do this through content creation, such as writing and tweeting about investing, strategy, and other topics related to their areas of investing interest.
Learn to Evaluate Deals
Once you start seeing deals, the next step is picking the right deals to invest in. To determine if you’re investing in the “right” deal, consider filtering all deals through a series of questions. Ask yourself if the company aligns with your investment thesis, if the company has 100x potential, if the company has traction, if the company will be able to raise another round of financing, if the company has good signal, and why the founders are letting you invest.
Winning allocation as a newbie angel investor requires some degree of cooperation. Founders generally set aside a certain portion of the fundraise for small checks from angel investors, but all must invest on similar terms, and don’t get much say by way of valuation or control. As such, you should aim to set expectations with founders around your investment process, including the number of meetings you require, and the amount of access you need to make a decision.
Size Your Check
Because angels invest their own money, many can only afford to cut relatively small checks. Check sizing is a function of how much allocation you’re offered, the startup’s valuation, and your level of belief in the business. Keep in mind that the larger the valuation, the more it’ll cost you to purchase a meaningful equity stake. At the same time, investing as little as $1k in deals can be a great way to earn more allocations, test your investment thesis, and fund more companies.
Build a Diversified Portfolio
To mitigate risk in angel investing, many investors attempt to build a large and diversified portfolio of investments. This means having a variety of companies, at least 10-20, across different industries, stages, and geographies.
Support Your Portfolio Companies
As an angel investor, it’s important to support your portfolio companies beyond just writing a check. This can include making introductions, providing advice and mentorship, and helping with recruiting.
Angel investing is a long-term game. It takes time to build a diversified portfolio and see returns. As such, it’s important to be patient and not expect immediate results.
Overall, becoming an angel investor requires a lot of research, networking, and due diligence. By following these steps, you can increase your chances of success in this exciting and high-risk field.
Angel Investing Resources
Aspiring angel investors have access to a variety of tools and services that can help them get started in the world of startup investing. Here are some recommended resources:
AngelList is a platform that offers a wide range of investment options for angel investors. With over 1,000 fund managers on the platform, investors can easily invest small amounts in venture funds and SPVs. AngelList also offers tools that make it easy to track performance, discover new deals, and connect with other investors.
Republic is a platform that allows non-accredited investors to discover and invest in startup deals, as well as deals in real estate, crypto, and other sectors. The platform offers a variety of investment options and provides investors with access to high-quality deal flow.
SeedInvest is an equity crowdfunding platform that vets every startup that applies to be listed on their platform, ensuring quality deal flow. Unlike AngelList and Republic, SeedInvest has lower investment requirements, and non-accredited investors can also participate.
Hustle Fund’s Angel Squad
For those who are looking for access to deal flow and the institutional knowledge to improve their investing skills, Hustle Fund’s Angel Squad is a program that teaches members how to angel invest and provides investment access to top-performing startups in Hustle Fund’s portfolio. Members will be invited to hear live pitches from Hustle Fund portfolio companies, attend virtual and IRL networking events with Hustle Fund’s 1.1k+ members, and receive guidance and training from Hustle Fund managing partners, including Elizabeth Yin and Eric Bahn.
In summary, AngelList, Republic, SeedInvest, and Hustle Fund’s Angel Squad are all excellent resources for aspiring angel investors. Each platform offers unique features and investment options that can help investors get started in the world of startup investing.
How much money is needed to become an angel investor?
To become an angel investor, one needs to have enough money to meet the accredited investor requirements. These requirements include an individual or joint net worth in excess of $1 million (excluding the value of a primary residence) or individual income in excess of $200,000 or joint income in excess of $300,000 for the two most recent years with a reasonable expectation of reaching this level in the current year. However, it is possible to angel invest without meeting these net worth requirements if one holds a Series 7, 62, or 65 license.
Do angel investors receive payments?
Angel investors receive payments when the companies they invest in experience a liquidity event, which is a rare occurrence. The most common types of liquidity events are an IPO or acquisition by another company. Angel investors may also be able to sell their equity stake to another investor without the startup itself going under a change of control. However, it is important to note that angel investors should be prepared to never be paid back on a majority of their investments.
Is angel investing tax-free?
Angel investing is not tax-free. Realized returns from angel investing are typically taxed at the long-term capital gains tax rate (assuming the asset has been held for at least three years), which tops out at 20%. Capital gains can be offset by writing off capital losses from angel investing. Many angel investors also save on capital gains by utilizing the qualified small business stock (QSBS) exemption, which allows U.S. investors to exclude or defer federal capital gains taxes upon the sale of the stock.
In summary, becoming an angel investor requires meeting the accredited investor requirements, and angel investors receive payments only when the companies they invest in experience a liquidity event, which is rare. Angel investing is not tax-free, and realized returns are typically taxed at the long-term capital gains tax rate. However, many angel investors save on capital gains by utilizing the QSBS exemption.
Become an Angel Investor via Angel Squad
Angel Squad offers a program that teaches individuals how to become angel investors. The community is made up of executives, operators, creatives, and visionaries. Visit their website to learn more.
Frequently Asked Questions
Requirements to Become an Accredited Investor
To become an accredited investor, one must meet certain financial requirements set by the Securities and Exchange Commission (SEC). As of 2021, an individual must have a net worth of at least $1 million, excluding their primary residence, or have an annual income of at least $200,000 for the past two years with the expectation of earning the same or higher income in the current year. A married couple can also qualify as accredited investors if their joint income exceeds $300,000 for the past two years and is expected to remain the same or increase in the current year.
Difference between Angel Investors and Venture Capitalists
Angel investors and venture capitalists are both sources of funding for startups, but there are some key differences between the two. Angel investors are typically high net worth individuals who invest their own money in early-stage startups in exchange for equity. They often provide mentorship and guidance to the startups they invest in. In contrast, venture capitalists manage funds that are raised from institutional investors and invest that money in startups. They typically invest larger sums of money in later-stage companies and often take a more hands-on approach to managing their investments.
Best Angel Investing Platforms
There are several angel investing platforms that individuals can use to find and invest in startups. Some of the most popular platforms include AngelList, SeedInvest, and Wefunder. These platforms allow investors to browse and invest in a variety of startups, often with low minimum investment amounts.
Amount of Money Needed to Become an Angel Investor
The amount of money needed to become an angel investor can vary depending on the individual’s financial situation and investment goals. While there is no minimum amount required to become an angel investor, it is important to have a significant amount of disposable income to invest in startups. It is also important to have a diversified investment portfolio to manage risk.
Finding a List of Angel Investors
There are several ways to find a list of angel investors, including attending networking events and joining angel investor groups or networks. Online resources such as AngelList and Crunchbase can also provide information on individual angel investors and their investment history.
Examples of Successful Angel Investors
Some of the most successful angel investors include Peter Thiel, Ron Conway, and Chris Sacca. These investors have made successful investments in startups such as PayPal, Google, and Twitter. While their success is notable, it is important to remember that investing in startups carries significant risk and success is not guaranteed.
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