Would you like to invest in start-ups and other businesses, but don’t know where to start?
Start here. We have a guide for anyone who has the dream of becoming an angel investor. Whether you are a recent college graduate or someone who has been investing for years, there is something for everyone.
You’ll learn the basics of how angel investing works and will discover what to expect from each step along the way. You’ll also find out how investors typically structure their investment portfolios as well as ways that angel investments differ from traditional venture capital or private equity investments (and which we prefer).
According to Feit, an allocation of 5% to 10% makes sense for most people, and keeping this portion of a portfolio small can enhance returns while decreasing volatility.
What Is an Angel Investor
Angel investors are essentially individuals or groups who provide small amounts of capital to businesses that need start-up funding or growth capital. This can be used for a variety of reasons, including acquiring new customers, hiring additional staff, or even expanding on the business.
The angel investor may be able to take on a passive role in the business, meaning that they will not have much say in how it operates long term. On the other hand, they may also become very involved in the business over time and help guide it’s strategy – especially if their role is active.
Becoming an angel investor requires a lot of diligent research, but it can also be very lucrative. This can be a great alternative when you are looking for passive income or a new way to grow your investment portfolio.
There are around 300,000 Americans that strive to do so as angel investors for businesses.
The Benefits of Being an Angel Investor
If you’re looking to invest in a startup company, you may want to consider working with an accredited investors angel group. The Angel Capital Association is a great resource for finding reputable angel groups, and they can help you connect with potential investments that fit your criteria.
If you want to be an angel investor, the benefits are numerous. First and foremost, you have the opportunity to invest in exciting start-ups – in industries and business models that may not even exist yet.
This is a chance to potentially get in on very early-stage deals that could end up being multi-billion dollar companies. You have the chance to see your investment grow over time as these businesses develop and gain more customers while also potentially paying dividends along the way.
Nearly every business will require some part of funding at some point during it’s development. A lot of businesses are looking beyond traditional funding options such as banks or private equity firms and instead are looking towards angel investors for the funding they need.
9 Ways Angel Investors Can Help Your Startup
One of the most interesting things about angel investing as a business model is that you have the ability to take on a hands-on approach to your investments. You can act as an advisor, investor, or another role within the company.
According to the Center for Venture Research, there were more than 300,000 individual angel investors in the United States in 2019, providing money to over 60,000 startups per year.
Here are some other things you can do with angel investing:
1. Research New Ideas and Trends
One of the greatest benefits of being an angel investor is that you get to invest in all kinds of different businesses and industries that may not be mainstream yet. This includes everything from alternative medicine practices to mobile phone applications for your car – even if these aren’t very well known or haven’t been around for very long.
2. Provide Early-Stage Capital
If you want to be part of a company’s early-stage funding, then angel investing is a great option. Many startups are actually looking for angel investors to provide these types of funds. In exchange, they will look to the angel investor as an advisor and help them find ways to make their business more profitable.
3. Be Involved from the Beginning
You have the chance to become very involved when you invest in a startup – whether it’s as an investor or simply by being around for those early days and helping out where you can. Angel investing is a great way to have a personal stake in a company as it grows and also be part of the exciting journey along the way.
4. Lend Your Expertise
One of the benefits of being an angel investor is that you get to follow along as the company grows and provide your own expertise on how to make it more profitable. This can include anything from recommending new partners, directing the marketing strategy, or guiding them on where they should be spending their money most wisely.
5. Provide Valuable Feedback for Management
Being an angel investor can allow you to give valuable advice and feedback on how a company can improve. In exchange for your expertise, you will likely have some say in how that company should be operated. This can include making improvements to their operating model or providing recommendations for new hires.
6. Invest in New Businesses You’re Passionate About
Many angel investors are so passionate about the companies they invest in that they will even start their own businesses around the industry they are involved with. If your passion is with a particular area, then angel investing can give you access to be a part of this unique market and help build something incredible in the process.
7. Request Investment from Other Angel Investors
One of the benefits of investing in other angel investors is that you may be able to request investment for your particular business. This can be a great way for you to get even more capital than your initial investments.
8. Submit Your Business to AngelList
If you are an angel investor, then there is a great chance you have heard of AngelList – it’s considered the premier site where startups and investors can find each other and do business.
You can sign up with your company’s profile and then list your company with a certain value on their website. AngelList will then act as a matchmaker to connect you with other investors and potential partners.
9. Find Your Next Big Opportunity
One of the benefits of being an angel investor is that you get to search for your next big opportunity. A lot of these companies are just looking for seed funding to build their business model and become profitable.
After this, they can look for additional funding from private equity firms, venture capital, or other traditional sources of funding. This can be extremely beneficial for both parties involved, including the investor and the startup.
How to Find the Right Investment Opportunity
If you’re looking for investment advice, it’s important to find an accredited investor. Angel investing can be a great way to start angel investing, but it’s important to remember that you’re investing your own money. Financial advisors can help you make sure your invested capital is being used wisely.
The following are some ways you can find the right investment opportunity.
1. Look at the Team Behind the Company
One of the best things to look for when evaluating a potential opportunity as an angel investor is to check out the people behind the business. The CEO and owners should be experienced, have a good track record, and are passionate about what they are doing.
You will want to make sure that with taking on so much of their own capital and risk, they can afford to do their jobs well – especially since you will be counting on them!
2. Look at their Business Plan
A business plan is something angel investors pay close attention to before investing in any company. You will want to verify that they have a solid plan of action and that everything they are doing with their business is realistic and achievable.
3. Look at their Financials
One of the most important tools you have to evaluate a company is to look at its financials. This includes looking at revenues, profits, cash flow and other important aspects like their payback period and net present value. Make sure the company has realistic numbers in these areas or they may not be able to sustain themselves for very long – even with your help!
How to Negotiate and Close the Deal
Once you find the right company to invest in, you will want to negotiate the terms of that agreement. Here are some tips for how to do that:
1. Build a Relationship
You don’t want to come across as someone who just wants to get in and out as quickly as possible. You need to build a relationship with your partner or a business owner. This includes working with them, giving them advice and supporting them along the way – both financially and from an advisory standpoint. When you treat your investment like this, then it is likely that they will do the same for you!
2. Stay Involved
Even if you have to invest a smaller amount of money than you might like, don’t just go for the first business deal you come across. Stay involved and look for other opportunities that are also worthy of your time and money. Make sure you have a good mix of portfolio businesses that will help keep you relevant and in touch with new trends in the market.
3. Protect Yourself Financially
There are many different types of investment agreements, but you will want to make sure it is totally protected from your potential losses as much as possible. One way to do this is through a convertible debt structure, which allows the investor to convert their debt into equity or get their principal back if they want.
What Does it Take to be a Good Angel Investor
If you are considering getting started in angel investing, here are some things you should know:
1. Be an Investor, Not a Broker
One of the biggest mistakes people make is thinking they can sell to investors and then buy investments. This is not something angel investors do and shouldn’t be considered part of their portfolio at all. You need to invest in the businesses you are supporting so that they can grow and become profitable. If you are looking for a quick way to cash out, then look elsewhere!
2. Know What You Are Looking For
Don’t go into investing with one specific type of business in mind. This can make it hard to find the right investment opportunity, and you may want to shift your focus after you look at the first few companies.
You will want to look for a variety of businesses with different values, needs, and sizes. It’s important to diversify as much as possible in order to get the most out of your angel investing experience.
3. Look Beyond Your Profit Margin
Even if you are investing because you want to make money, there is a lot more than just return on investment (ROI) that matters. You need to look at the potential for growth in this particular business and how it fits into other trends in your market. Be sure that the business has a solid plan of action and that the entrepreneur is capable of achieving this.
4. Take on More Risk and Work Harder than You Think
Finally, you have to have both the passion and commitment to invest in businesses that others would not even think about supporting. You will be leading these businesses with your money, so you need to give them your support!
Also, take on more risk by investing in companies where you feel there isn’t a lot of competition on the market. Most emerging businesses require more capital than any single investor is prepared to provide—often in excess of $1 million.
The Character Traits of an Angel Investor
There is no one right way to do angel investing work, and each investor has their own method that works for them. However, one thing that all angel investors have in common is that they are willing to risk their entire investment in order to get a high return.
While many angel investors are successful, there is always the risk that the angel investments lose. However, for those who are willing to take the risk, angel investing can be a great way to earn a high return on their investment.
If you are going to invest in a business, then you really need to meet some of the following strengths. They will help guide and direct the way for your investments, as well as protect you from major shortcomings that can cause a business to fail.
Angel investors should have a reputation of trustworthiness from other investors and clients alike. This means that they cannot be seen as being untrustworthy or lacking integrity. Also, remember that these people are giving their money to other people’s ideas, so they need to know that these businesses are good investments in order for their money to be protected!
Also, look at how the entrepreneur plays their role in regard to communication and openness. If they can’t manage these things, then they probably won’t be able to run a successful business.
2. Possess Business Experience
Angel investors should have a strong foundation in running their own business or working in one that has succeeded before. They need to be able to provide advice and support with their own skill sets rather than general knowledge of business ownership.
You don’t have to have the same type of experience, but you should still be able to see the big picture when it comes to the success or failure of a business idea. Also, you need to know how to negotiate and close deals with a company.
3. Have Financial Resources
This is another area that is important when looking to invest in other people’s ideas. You will want to have enough money to make the investments, but you also have to be able to understand the current financial troubles of a business you are looking at investing in.
This means going into enough detail about their financial situation so that you can see where the money will come from and what the risks are if things don’t go well. Also, they should be able to show you their past two years of tax returns so that they can demonstrate their ability to make these investments pay off!
4. Be Supportive
Once you have found a good business to invest in, you need to support them every step of the way. This includes giving them advice and helping them through their struggles and challenges.
An angel investor is not the boss when it comes to the business; they are there to help the business grow into something much larger than they could ever be on their own! This includes learning how to work with their team of employees and providing a perfect example for others who may be looking up to them.
5. Be Passionate About Their Investments
You will not find very many angel investors that don’t already have a passion for whatever entrepreneurial venture they have invested in. They have already put their money into a business and need to know that they have more than a few months to prove them right.
They are not trying to lose money; they are trying to make it back with their investments! This will also ensure that you stick around through the good times and bad, as well as during the risky stages.
What is an Angel Investment Agreement
If this is all new to you, then don’t worry! These agreements are basically just contracts between two parties discussing how the investment will be structured and how it will be held. There can be many different things that are written into these agreements, so you should read them carefully before signing anything.
How to Start Angel Investing
If you are ready to take the leap into the world of angel investing, then there are a few things that you need to know before you start. This will ensure that you are prepared for any risks and also
be able to ask the right questions when it comes time to do your research!
1. Be Aware of Your Risk Tolerance Level
Everyone has a different level at which they stop taking risks with their money. No one wants to lose everything that they have worked for, but sometimes it is the very people who take more risks who end up making more money in the long run.
Look at your monthly income and expenses so that you can see what your total risk tolerance level is. If it is lower than your total net worth, then you should not be investing. However, if it exceeds your net worth, then this will help protect you from losses.
2. Know What You Are Investing in
Once you know the general area that you want to invest in (such as “FinTech” or “Creative Design”), then look at the best investments in that sector. As a general rule of thumb, these are going to be companies that have gained a solid amount of traction with their investors and are also working with other businesses in the market. Again, this will help ensure that they can continue to make their investment and also earn a good return on it.
3. Research the Company’s Market
Angel investors need to know that their investment is working in a market that is going to grow and sustain for the long run. Once again, a lot of this falls on you being able to see the potential and how your investment will become very valuable in the future.
However, you should also be able to speak with other people who are familiar with this type of business and market to get their opinion on how things are going.
4. Look at Their Team of Employees
A business is only as good as its team of employees! If you find an entrepreneur who has created a solid group of workers around them, then this should be another reason why you invest in their company.
They will have a solid basis of support that should help them make their business even more successful in the long run. You should also try to see if they have any mentors or advisers who can help reach this goal.
The good news for early-stage investors is that the number of angel investment groups in the United States has increased in recent decades.