In the fast-paced world of finance and investments, the term “angel investing” has gained significant traction and become a buzzword of the ‘00s. You might be asking yourself, “What does it mean? Where does it take place? How can I be an angel?” Throughout the rest of this article, we will provide clarity as to what angel investing is, and also outline how it differs from other forms of investing. We’ll additionally highlight what makes angel investing unique from a growth and skill development standpoint.

Understanding Angel Investing

What is Angel Investing?

Angel investing is an exciting avenue within the realm of investing in private companies that involves individuals, often referred to as “angels,” who provide the capital needed to nurture the growth and operations of (typically) early-stage startups. Unlike more traditional financing avenues, such as bank loans or professionally managed funds such as venture capital, angel investors deploy their funds personally, taking calculated risk in exchange for equity ownership in the business. Angel Investors typically participate in the earlier rounds of funding including but not limited to pre-seed, seed, seed+, and Series A rounds when valuations are lower and when more traditional financing options are harder to secure. 

The Role of Angels.

Angel investors are not often viewed as mere benefactors who bring capital to the table, nor are they always driven exclusively by financial gains. Rather, their involvement (alongside capital infusions) may encompass mentorship, strategic guidance, and a wealth of industry expertise backed by the motivation to foster innovation, mentor new entrepreneurs, and actively participate in the growth of promising new ventures. Angel Investors may be passive check writers or more actively add value to companies they invest in. Alongside capital, they may choose to invest their time, expertise, and open up their networks to help advance the startups they invest in. This active engagement sets some angel investors apart from others and founders may proactively choose to work with angels that are best aligned in terms of the expertise and intel that they bring. Angels typically invest in earlier rounds that may not have institutional (AKA, professional) capital at play. Angels often make up or help complete a critical funding juncture that founders may need to rely on as a means to financing at the earlier stages of their venture.

Risky but (potentially) Rewarding!

Angel investing is often associated with its distinct risk-reward profile. While the potential for large returns is a tempting lure, it’s important to acknowledge the inherent risks that are associated with this asset class. Startups are risky by their nature. Data shows that approximately 20% of new businesses fail during their first two years of being open, 45% during their first five years, and 65% during their first 10 years. Angel investors must be prepared for the possibility of their investments not yielding the desired outcomes whether it is in the form of a failed venture or a smaller capital return than expected. Investment dollars are often tied up for years – possibly five to ten plus – and most investments don’t offer an option to receive liquidity (some or all of your investment dollars back) unless there is a full exit of the business.

Angel investing is often compared to gambling given the real possibility of losing your money and associated risks. Some angel investors have proven again and again that they can pick winners. What are they doing right that other angels are missing? By being proactive and diligent to select quality and well positioned deals and teams, angel investors can reduce some of the risk associated with this type of investing. By no means can you expect you’ll only invest in winners, but if you’re proactively plugging into quality deal flow and asking the right questions to seek strong teams and robust business plans you can considerably pare down the risks associated with your investments. 

Given investment so early in a company’s journey (and at low valuations, given the early stage of investment), angel investors are able to achieve outsized returns if their investments do happen to work out. People often refer to the Rule of 7 when investing in public markets. This rule states that given historical market returns, an investor can double her or his money after 7 years. What if we told you that we’ve seen angel returns of 70X over 8 years? The high flying winners often make up for and carry the rest of the angel portfolio. This is just one reason why diversification and portfolio allocation matters, as opposed to investing in just one, two, or a couple of businesses.

What distinguishes angel investing from conventional investments?

1. Early-Stage Focus: Unlike traditional investments that often involve established companies with established track records, predictable revenue streams, and a well-defined market presence, angel investors typically target startups in the earliest stages. This funding typically provides a critical lifeline to funds when other financing options might be limited.

3. High Risk, (potentially) High Reward: Let’s be clear, angel investing is not meant for the risk-averse. Investing in earlier stage businesses carries real associated risk. However, if a startup is successful, the potential returns can be outsized given the early investment was likely made at a low company valuation. This can more than make up for the risk and expected losses across other investments in your angel portfolio. There is often no access to liquidity (your funds or payouts) for several years or more, assuming the investment doesn’t go to zero!
4. Potential for Hands-On Engagement: Conventional investors often play a passive role with their engagement limited to financial transactions and periodic updates. In contrast, angel investors may choose to wear multiple hats, assuming the position of mentor, advisor, and all around resource. Ultimately, the profit or loss of their investment is directly tied to the well-being of the company, so they may take a more active role in offering strategic guidance and leveraging their industry expertise to support the startup. Some angels won’t invest in a business unless they believe they can help the business in some way through expertise or their network. Founders may also be selective in terms of where they accept funds and will require that their investors be able to support them in some way.

Top 8 Benefits of Angel Investing

1. Access and Influence: As an Angel Investor, you’ll enter new rooms, conversations, and networks. You can be influential in company operations, and invest in ways that bring resources to new markets and products that have been overlooked or where you feel there is a real impact to be made. Women’s healthcare and products made with women in mind, for instance. You can choose where your dollars go and which companies get backing to launch and scale. 

2. Skill Development: When you start actively participating through writing checks, you open yourself up to new skill development, transformative learning, and the possibility of a real mindset shift. The act of running diligence and committing your own capital will force you to learn new skills and develop an investor mindset. You’ll be able to dive into operations and strategy at new businesses and expand your knowledge base in the process. Some of the tangible skills learned from becoming an angel investor include learning how to evaluate what makes a good investment opportunity, assess associated risks, negotiate terms, and manage and execute against your financial goals and interests. 

3. Early Access to Innovation: Angel investors gain early exposure to cutting-edge technologies and disruptive business models. This insider perspective places them at the forefront of industry trends, allowing them to anticipate shifts and capitalize on emerging opportunities. As a result, they have more potential for financial gains as well as ability to influence the trajectory of the investment and market landscape.

4. High Growth Potential: The early-stage nature of angel investments means that you have the chance to get in on the ground floor of the next big thing. Startups with innovative ideas and disruptive technologies have the potential for exponential growth, leading to substantial returns for angel investors.

5. Networking and Career Pathing: Engaging with startups opens the door to a vast network of fellow investors, entrepreneurs, and experts. These connections can lead to future investment opportunities, partnerships, and collaborations. You may find yourself asking questions and aligning with a new career path out of your investing experience and exposure. Or maybe just stepping into new board and advisory roles alongside your day job, if it aligns and is of interest.

6. Personal Satisfaction: Beyond potential financial gains, angel investing may offer a sense of personal fulfillment. Especially for those allocating capital in a way that’s deeply aligned with their values and recognition of gaps that exist in the world. You are funding the future you want to see. You aren’t at arm’s length through others allocating your capital but are able to be influential in where its put to work!

7. Tax Incentives: In many regions, governments offer tax incentives to angel investors as a means to promote startup growth and innovation. These incentives can include deductions or credits on investments made in qualifying startups. Your investments may also be eligible for massive tax savings (reference QSBS for U.S. tax benefits) if they satisfy certain criteria. By leveraging these fiscal advantages, angels not only amplify their potential returns but also contribute to a broader ecosystem of innovation-driven progress.

8. Contribution to Economic Growth: Angel investing is a cornerstone of economic development, propelling job creation, innovation, and overall economic growth. Their catalyst role is evident in both local and global economies, fostering fresh and relevant entrepreneurial ideas. 

We hope you’ve gained a better understanding around what angel investing is and how it can work for you. If you’re interested in learning more, we recommend investing or exploring alongside other skilled individuals, whether it be an angel angel group like ours or another network you have access to. Investing alongside others will allow you to pool your resources and insights and give you access to a bigger potential deal network. Deal sourcing is huge. You don’t want to invest in the few businesses who may approach you looking for capital, but should aim to seek out quality deals proactively so that you can evaluate which may align, if any.

In the U.S. you must be an accredited investor to allocate capital as an angel. This accreditation requirement can be met through satisfying the income threshold (of at least $200k over the prior two years), net worth ($1M in net worth excluding the individual’s primary residence), or additional channels such as through an individual’s financial expertise. Even if you’re not accredited today, there are ways to map a path towards angel investing and ownership by building on your financial expertise, navigating into equity ownership before you’re accredited, and through exploring options and creating goals to meet accreditation requirements in the future. Please note that the process of becoming an accredited investor is a simple self-accreditation form that investors must fill out (on their own behalf to an angel group and/or through investing paperwork) to depict which criteria applies to that individual to meet the accreditation requirement.