When you hear the term “angel investor”, what comes to your mind?
For many people, it will bring visions of Shark Tank, with big investors like Barbara Corcoran, Daymond John or Kevin O’Leary scrutinizing presentations from their panel seats.
If you’ve ever wanted to get the sorts of opportunities they have to invest but perhaps thought angel investing would be out of reach for you, the good news is that it’s not. You may not be able to invest the same large sums, but you can become an angel investor starting out with just $100 or so.
Here’s what I mean:
Angel investors typically invest in small startups as a means to help the company grow through the early stages of its inception. In many cases, “angels” are family or friends of the founders who are keen to help them succeed.
In more recent years, angel investing has become more available to a wider range of investors with the advent of online platforms. Investors may also be known as “seed investors” and typically invest in return for equity in the company or debt which they will be able to convert later. They will usually exit their investment if the company is sold or if there is an initial public offering (IPO).
There’s a common misconception that angel investing is only open to those who can meet the standard to become “accredited investors,” meaning that they have sufficient income, net worth and asset size to meet Security and Exchange Commission requirements under Regulation D.
The reality is that since a modification to investment rules came into play in May 2016, non-accredited individuals can invest in these companies via the online platforms that have sprung up, subject to certain limitations.
This means that becoming an angel investor is as simple as having some money available to invest, doing your research on the investment and making that investment online.
Angel investing is now open to more investors than ever before
In short, very. To put it into perspective, according to the Small Business Administration, more than 500,000 small businesses are started each year and around half will fail in their first five years. As an angel investor, you could lose every dollar you’ve put into the business.
This means you should never invest a greater amount than you are prepared to lose entirely.
The flipside of this is that, with a good strategy in place and a little patience on the part of the investor, you can potentially realize some very decent returns, especially as compared to other classes of investment.
It often isn’t easy to pick which investments will be worth it in the early stages of a business, which is why you need to come up with some kind of criteria around why you would choose to make an investment.
Mike Maples was Twitter’s first investor and talks about how it was a somewhat unknown quantity at the time he invested.
“When people tell you they saw the future of these companies at the time they invested, they are usually blowing smoke. Serendipity and the ability to make the most of it play a much bigger role than most will admit.”
This makes angel investing sound very much like a coin toss, which it is to some degree, although there are investors out there who are consistently successful with their strategies. To have some success though, many have been through multiple failures first. Consider this from Andy Rachleff, CEO of Wealthfront:
“Everywhere I go in Silicon Valley I hear people discussing their angel investments. The conversations remind me of fish stories. People love recounting the one time they caught a big fish, not the many futile hours they spent waiting for a bite.
You’ll hear successful angel investors use terms like “patience,” “discipline,” and “diversification.” That is because providing seed money is not a “get rich quick” scheme, but you can do well if you have the discipline to create and follow a strategy as well as ensure that your risk is spread across different opportunities.
You’re going to get different opinions on “the best” investment strategies depending on who you talk to and what their experiences have been, so from observation and research, I’m looking at a few different strategies that successful investors follow.
Always keep in mind that any successful investor is doing what they believe is right based on their own financial situation. Develop your own strategy based on your circumstances and preferably, with the help of a qualified advisor:
Twitter is actually a great example here. Prior to it taking it’s 140 character micro-blog format, the founders had started a podcasting platform (which was Mike Maples’ first investment with them). When iTunes made podcasting free, that put an end to their podcast software, however they did have this “Twttr” idea in the background. Twitter became their new product and the rest is history.
How easy would it be for the business you are looking at to make a pivot to a different model? Startups often go through different iterations so it’s good if they haven’t bet the entire farm on one, relatively inflexible model.
The experience, background, passion, and skill of the person or people who are leading the startup should factor heavily into any decision to invest. Experienced investors look for business management who have a history of success or who at least are being mentored by people who do.
A popular criteria for successful investors is to target products and services which have the potential to reach a sizeable audience and keep them engaged over time. They look at current audience and growth, as well as marketing plans and current strategies to boost growth moving forward.
A strategy from investor and Paypal co-founder, Peter Thiel is to look at how much the CEO of the company is getting paid. This is because if the CEO is being paid a large salary, then the chances are everyone else in the company has relatively high salaries too and they’ll chew through money much faster at that critical startup phase.
When CEOs are getting paid less, there’s a good chance they share the same interests as any equity shareholders in the financial performance of the company.
If you’d invested all of your funds into Twitter as an angel investor, you’d probably be pretty happy at this stage, but that’s definitely not the norm. The chances are good that if you did put “all your eggs in one basket”, you’d have to kiss them goodbye.
Successful angel investors expect to lose some and plan accordingly by having a diversified portfolio. The idea is that hopefully, even if some fail spectacularly, others will prove to be winners and more than balance those out.
There are many possible platforms I could mention here (and I have done previously), but just briefly, my favorite platforms are Seed Invest, WeFunder and Angel.co. These are all platforms that are based in the US, which I have used and had good experiences with. Overall, they present some great opportunities for quality investments.
When I’m looking for an investment, I do like the standard equity option, however, those are reliant on a liquidity event to see a return, such as an IPO or an acquisition. These events often take a long time to come to fruition.
My new favorite way to invest is to find revenue participation offerings that are secured with a promissory note. I have three such investments at the moment:
Getting started as an online angel investor is a relatively simple process. Any of these platforms begin with setting up an account and setting any preferences in terms of investment types and amounts. The trickier part on your behalf will be deciding on the right strategy for your own investing.
A clear advantage of these platforms is that you have access to many opportunities and can spread your risk across several, rather than sinking everything into one business. They are also helpful for being able to filter data and easily set criteria for yourself.
Will you (or do you already) invest in companies using online platforms? You don’t need to be Daymond John to become an angel investor, but you do need to complete due diligence before making any investment decision.
The loosening of laws governing who can invest in 2016 and the creation of several online platforms to facilitate investments have somewhat democratized the investment process so that anyone with funds can find opportunities.
Devise your investment criteria, do your homework on investments and all the best for a prosperous step into angel investing.
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