The phrase “angel investor” originated on Broadway to describe producers who put up money to save theatrical productions that were in danger of closing. If the production didn’t turn into a success, the producer lost their money.
Today, angel investors are crucial to the rapid pace of development and progress in our world, especially in areas like technology and community growth. According to the Angel Capital Association, angel investors provide up to 90% of outside equity raised by startups, excluding contributions from friends and family. Angel investment can also be a rewarding way for successful people to fund and guide the next generation of businesses owners and spread more Return on Life.
Are you ready to give back, innovate, and be a part of a new business success? Here’s a quick primer on becoming an angel investor.
1. Who is a modern angel investor?
We know what you’re thinking … and yes, angel investing is sort of like “Shark Tank” (U.S.) or “Dragon’s Den” (England and Canada).
Angel investors are typically wealthy individuals who invest their personal capital into startups during their early stages of development. In exchange, an angel typically receives a sales percentage, an ownership percentage, or some combination of the two. Sometimes more than one angel will pool together and form a syndicate that invests in larger deals with smaller individual exposure.
In addition to their wealth, angels are often accomplished businesspeople or fund managers who have world-class experience to offer. They often also “invest” their time by providing guidance to the companies they’re investing in, and by opening up their professional networks.
Unlike venture capitalists, who are typically risk-adverse, hands-off, and focused on maximizing returns for their funds, angel investors usually have a motive beyond pure profit. An angel might be a retiree who invests as a hobby, or someone trying to diversify their portfolio. Some angels invest in mission-driven companies that are trying to impact big problems in the world. Others might want to boost small business activities in their hometowns.
2. How much is a typical angel investment?
According to the U.S Securities and Exchange Committee, angel syndicates invested over $25 billion in early-stage companies in 2020. And while the size of angel investments can vary wildly, a study by the Center for Venture Research at the University of New Hampshire found that in 2020 the average angel deal size was $392,025, for an average equity of 9.6%.
3. What do I need to become an angel investor?
Anyone with money to invest and enough business experience to spot promising companies and good deals can become an angel investor.
However, larger investments in growing companies that are beyond the earliest stages of their formation usually require accreditation. For example, to qualify as an accredited investor in the United States, an individual must have over $1 million in net worth (excluding residence) or an annual income of at least $200,000. The U.S. also grants accreditation to individuals with demonstrable professional expertise or financial professionals who hold certain licenses.
Successful angel investors also need a clear vision for what they want to accomplish. Why do you want to invest in startups rather than pad your savings or investment accounts? Are you trying to combine your entrepreneurial and altruistic sides? Are you willing to invest your time as well as your money? How much risk are you willing to take? How much money can you afford to lose?
The answers to these questions could have ripple effects throughout the rest of your financial plan. Before you become one of the “Money Tigers” (Japan), let’s meet to discuss your investment goals.
