An Introduction to the World of Angel Investing

How to Become a Successful Angel Investor

Excited by the prospect of nurturing the next Google, Facebook, or Apple? If so, and if you’re also willing to make big bets with your money, then angel investing might be just the ticket.

Angel investors are the individuals who finance business startups after the founders have put up their own capital and raised as much as they can from friends and family. The number of angel investors is growing. CB Insights reported a record-breaking $36.2 billion in 4,679 combined investment deals by angel investors in 2022.

It is risky, however, to bet on startups. The chances that they’ll fail – and that you’ll lose your entire investment – are quite high.  Some sources put the failure rate as high as 90%. According to a 2021 Harvard Business School study, nearly two-thirds of startups never show a positive return. That’s why you’ll make multiple bets simultaneously and focus only on startups you believe can return huge numbers. Some seasoned angels say they are in it less for the money than for the excitement.

Angel Investors vs. Venture Capitalists

Angel investments typically range from $100,000 to as much as $1.5 million, and are generally made by accredited investors with earned income of  $200,000 per year or a net worth of $1 million.

You don’t have to be an accredited investor to invest in startups through crowdfunding platforms. Still, if you don’t have the financial sophistication or business acumen to invest wisely, then angel investing is probably not for you.

Though they both invest in startups, angel investors are not the same as venture capitalists (VC).

Angel investors are wealthy individuals who invest their own money very early in a startup. This is different from venture capitalists, for example, who typically fund startups with capital they have raised from third-party investors. Venture capitalists invest money held by a fund through a VC firm.

In addition, angel investing may not be as hands-on as venture capital, and the startup’s exit strategy may not be the primary goal. While angels want to turn debt into equity (also known as convertible debt), a venture capitalist is focused primarily on the endgame: the sale of the startup or the eventual public offering. And in turn, the VC may be more involved in the company.

Finding the Right Entrepreneur

When first considering an angel investment, look for an entrepreneur with an idea that will fill a gap in an enormous market.

Because of the financial risk involved, you may limit yourself to entrepreneurs you’ve met through your own connections. Or you might seek out entrepreneurs you don’t know personally but who are fanatical about their innovations.

Maybe you will focus on those who have excelled at everything they’ve ever done — at school, sports, work, or prior business ventures— banking on the theory that a winner once is likely to be a winner again.

However you meet entrepreneurs with potential investments for you, here are essential characteristics to look for:

• They should know every detail of their business: The market, competition, risks, and sales strategy.
• They should know how to expertly manage change: Your entrepreneur must be able to pivot if and when changes are warranted in their business model (which often turns out to be the case).
• They must be able to execute their business plan: In addition to an inspired idea, an entrepreneur must have the traits and practices to bring that idea to fruition.
• Extra points if they’ve participated in a startup accelerator: The mentorship and knowledge gained through these experiences help an owner cope with the hard work and ups and downs of their startup.
• They deliver a knockout presentation: You  might make just one or two investments out of a hundred startup presentations made to you. Skip the clichéd presentations and look for something fresh and original.
• Make sure they share all details of the idea: Learn everything there is to know about the idea to ensure it is free of theft and doesn’t expose you to breaking a non-disclosure agreement with another startup. Leave no stone unturned. The whole point of angel investing is to cultivate the entrepreneurs you believe to be the best and the brightest. Once you find the startup you want to support, demand integrity and commitment from your entrepreneurs. You will expect them to have put their all into advancing their business ideas while waiting to raise outside capital to commercialize them.

Your Role and Goal as an Angel Investor

As long as the potential market for a business is vast, you should be open-minded about new entrepreneurial ideas and not insist that the innovation necessarily be disruptive of an industry or market.

You might choose to become actively involved in startups you fund. You are, after all, gambling with your own money and, therefore, are naturally determined to do everything possible to promote success and control the risks of your investments.

Generally speaking, the goal of angel investing will be to monetize your successful investments within five years (some angels would say three). You already know that more than half of your seedlings will fail well before that.

Whether it’s a sale to a larger company or in an IPO, your target return will be at least three times — and, ideally, up to thirty times — your original investment. An angel’s equity stake in a startup varies with the size of its investment and the pre-money valuation of the company.  It can be as high as 40% at the time of investment, but it will be diluted through subsequent rounds of outside financing.

If you are a former entrepreneur who luckily struck it rich with the early-stage help of an angel, you can now regard your startup investments as a way of giving back to the innovation ecosystem the financial support and encouragement it once gave you.

---

We think you’ll also like:

1. Makin’ It Rain: Successful Startups are Investible Startups
2. Today’s Top Seed Stage Venture Investors 
3. The Increasing Appeal of Green Tech Investing

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Investing Basics for Beginners Installment #3: Never Put All Your Eggs in One Basket 
2. Earning Green by Investing Green 
3. Turning an Idea or Product Into a Business 

This is an updated version of an article originally published on August 15, 2014, and revised on January 21, 2020. ]

©2023. DailyDAC^TM, LLC d/b/a/ Financial Poise^TM. This article is subject to the disclaimers found here.