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?
Top 8 Benefits of Angel Investing
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.