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Becoming an angel investor is an exciting way to help a new company grow, and it also provides you with a great opportunity to receive a sizable return on your investment (ROI) if the business is successful.
It also doesn't take much to be an angel investor. In fact, in some cases, you can help fund a company with as little as $50.
Angel Investing Basics
Angel investors are individuals who help provide the money that businesses in the initial phase of operations need to grow.
Quite often, angel investors are former entrepreneurs themselves, or they may have worked in various other fields related to business. Therefore, they may also counsel startup companies on the best strategies due to their extensive knowledge of the industry, as well as their professional connections.
However, anyone can become an angel investor provided they have the funds to invest.
There are essentially two ways to become a startup investor, which include:
Accredited Angel Investor
Accredited angel investors are afforded investment opportunities not available to other angel investors (mainly the ability to sell and buy ownership shares of a company that is unregistered with the SEC) due to their official status.
To become an accredited angel investor, a person must meet the U.S. Security Exchange Commission's (SEC) requirements.
One of the requirements is the individual must have at least $200,000 in earned income for two years straight. The individual's net worth must also be at least $1,000,000, and he or she must also demonstrate that their current level of income will remain consistent for the year. According to Money Morning, “Most angel investments range from $25,000 to $50,000 per company. Some angel investors invest as little as $5,000.”
Micro Angel Investor
If you do not meet the requirements to become an accredited angel investor, under the Jobs Act passed in 2012, you can become a micro angel investor.
Micro angel investors simply pool their funds through crowdfunding to support the growth of a startup. In return, they, too, may receive ownership shares in the company.
What to Know Before Starting to Angel Invest
Becoming an angel investor comes with its share of risks as well as benefits, which many people tout as worthwhile.
Probably the biggest benefit for investors is knowing you are helping a company grow. However, for the startup, the main benefit is having cash to spur its growth without taking on debt, and the investment also doesn't accumulate interest.
Another benefit of being an angel investor is since they have ownership shares in the company, they are in a position to receive an impressive ROI, especially if the company goes public or is bought by another company.
However, angel investing also comes with its share of risks. For instance, only about 10% of startups generate a positive ROI, which means there is a 90% chance you will not receive a return.
It may also take a while for the company to produce income due to a number of factors, such as regulatory challenges. Unfavorable market and economic conditions can also hinder the initial public offering (IPO) or sale of a business, which can also delay your return.
As an investor, you are also in the hands of the people running the company, which puts you at risk of poor leadership.
Strategies
The main strategy to become a successful angel investor is to perform an analysis of the company, as well as its leadership, before you invest, which will alert you to various success factors, such as the company's performance thus far and the ability of the team, to give you greater confidence providing them your funds.
With proper research, angel investing can be a lucrative venture on its own, or it can be a great way to provide portfolio diversification.
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