You’re wise with your current investments, have a solid financial footing, and have grown quite an impressive portfolio. You’re a seasoned and successful investor — well-versed in the traditional realm of stocks, bonds, mutual funds, and real estate. And you may have even achieved accredited investor status.
Perhaps your success has led you to a place of wondering how you can use your high net worth to fund someone else’s dreams (while ideally receiving equity ownership).
Angel investing allows investors to pursue new, enticing, and unique opportunities by providing capital to entrepreneurs in their early stages who cannot or do not want to pursue traditional financing options. Many entrepreneurs rely on these angels to make their dreams a reality.
Let’s dive more into the specifics, consider the risks, and answer one of the most important questions… will you see a return on your investment as an angel investor?
What Is an Angel Investor?
An angel investor provides financial backing — either through a one-time payment or regular cash injections — to startups (either individuals or small businesses) and can be directly or indirectly involved in the startup’s affairs.
In exchange for this financial backing, angel investors receive an ownership stake in the business, with most angels seeking 20-50%. Often, angel investors can offer strategic advice to the start-up, in addition to funding, and will act as advisory board members or directors.
Angel investors are different from venture capitalists because they use their own money, rather than an investment fund, and typically choose to invest in new projects that intrigue them and where they want to see the entrepreneur succeed. Angel investors are typically there in the early stages of a small business while venture capitalists come in at later stages to help take a business to the next level.
Based on an extensive study performed in 2017, American angel investors invest an estimated $25 billion in over 71,000 startups every year with the average angel being 48 years old and the median capital being $25,000. Approximately 55% of angel investors have been CEOs or founders of their own start-ups and the number of women angels is increasing.
Angel Investor Returns
As with any investment, there are no guarantees of a financial return with angel investing. And, because angel investors are putting their personal money on the line for a startup that may or may not be successful (90% of startups fail), this type of investment can carry even more risks.
Angel investor returns depend on:
The startup’s success. This can depend upon numerous factors such as the due diligence of the founders and their business model, market conditions, the competitive landscape, industry trends, etc.
The amount of money invested. More money invested, either through a one-time payment or continuous financial support, typically translates into higher returns.
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The timing of investment. Investing in the earliest stages of a startup can provide the greatest returns if the business is a success.
The involvement of the angel. By providing regular, strategic advice and mentorship, angels can invest their knowledge and experience to help the startup’s success.
When successful, angel investors can earn a generous return on their investment, averaging 2.5x to 3.5x, depending on the data you look at. While you can choose to invest as much of your portfolio as you’d like into your angel investment(s), conservative investors typically allocate 5-15% of their portfolio to these particular investments.
Investing in multiple angel investments can also help your chances of partnering with a successful startup (especially if the investments span multiple industries). Angel investing is also a long game, with many angels not seeing a return for at least five to seven years, and sometimes even up to ten years.
How to Become an Angel Investor
Becoming an angel investor requires more than just having the appropriate financial backing. It also requires a certain amount of industry knowledge and experience, networking skills, a willingness to take calculated risks, and discernment to choose the right startups.
If your portfolio can withstand the increased risk of angel investing and you have the necessary capital to invest, you can get started relatively quickly. First, you’ll want to educate yourself in the world of startups and keep yourself updated on the latest small business market trends and strategies. This may come relatively easy to you if you’ve been an entrepreneur yourself or have a close network of entrepreneurs already.
Next, identify which market(s) you want to pursue and exactly how much you’re willing to invest (and potentially lose). Get to know entrepreneurs in the industry and fellow investors to learn tips and insights. Discover your investment options by attending pitch events and meeting founders — discover who you connect with and which products and ideas excite you most.
You can also become a member of the Angel Capital Association to join over 15,000 other angels and gain access to angel groups, accredited platforms, and entrepreneurial companies.
Learn how to identify the best investments by familiarizing yourself with business models and both the industry’s competitive landscape and growth potential. Discover how to evaluate the founder and their level of experience and potential.
Remember to keep your expectations in check — angel investing requires financial discipline, a long-term commitment and perspective, and a willingness to grow and potentially fail. If successful, however, you have the potential to provide an entrepreneur with the startup capital they need to turn their dreams into reality and the opportunity to have a financial and emotional stake in the business’s success.
Learn How to Fulfill Your Financial Dreams with Wealthly
Whether you’re already an accredited investor and ready to get started with angel investing today or building your financial bucket list, Wealthly is ready to help you. Through online education and 1:1 financial coaching, you can learn how to build your net worth, pay off debt, and get to a place where you can be someone’s investing angel (even if it seems far away right now).
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