How to Become an Angel Investor
Want to start angel investing but don’t know where to start?
My name is Kieran. I’ve made 25+ startup investments in companies like Loyal, Buildspace, and Wander and worked at an investment crowdfunding platform that helps regular people invest in startups and small businesses. Like you, I didn’t know where to start a few years ago.
So, I put together this guide based on my own experiences and with the help of some friends to help you navigate the angel investing landscape.
In this post, we’ll explore:
- What is an angel investor?
- Who can become an angel investor?
- What can I do if I don’t qualify as an angel investor?
- Where to start angel investing?
- Why do people start angel investing?
- What are the risks of angel investing?
- What to look for in companies before investing?
- What are the best practices for angel investing?
What is an angel investor?
An angel investor is an individual who provides capital to businesses in exchange for equity. Typically, angel investors are wealthy individuals from the business world — successful entrepreneurs, C-level company executives, and former professional investors.
Who can become an angel investor?
An individual qualifies as an angel investor if they meet any of the following accredited investor requirements based on wealth or measures of financial sophistication set by the US Securities and Exchange Commission (SEC):
Wealth & income
- Net worth over $1 million, excluding the primary residence (individually or combined with a partner).
- Income over $200,000 (individually) or $300,000 (combined with a partner) in each of the prior two years.
Financial sophistication
- Directors, Executive Officers, or General Partners (GP) of the company selling the securities.
- Any “family client” of a “family office” that qualifies as an accredited investor.
- For investments in a private fund, “knowledgeable employees” of the fund.
If you are an accredited investor, you can participate in all security offerings.
What can I do if I don’t qualify as an angel investor?
Then, you are considered a non-accredited investor. The good news is that you can still angel invest, but only in specific opportunities and up to a certain amount of money.
Non-accredited investors can only participate in Reg CF and Reg A+ offerings on investment crowdfunding platforms like Wefunder, Republic, and StartEngine.
As a non-accredited investor, you have an investment limit. You have the option to invest the higher of the following:
- $2,500; or
- If your annual income or net worth is less than $124,000, you can invest 5% of the higher value between your annual income or net worth or
- If your income and net worth are equal to or greater than $124,000, you can invest 10% of the higher value between your annual income or net worth, with a maximum investment amount of $124,000.
These amounts reset every 12 months.
Where to start angel investing?
Typically, the most common place people start angel investing is by investing in friends, family members, and former colleagues who start companies. If you have that type of network and are comfortable investing in people you know, that’s a great place to start.
If you don’t have that type of network, there are plenty of great places to start for beginners.
1. AngelList Syndicates (accredited only)
AngelList Syndicates are the easiest way to invest in startups. Sign up on the platform and apply to join a bunch of syndicates. Typically, when you apply to a syndicate, share your LinkedIn or a personal website so they can see your background. Some syndicates are more selective than others, but these are typically open to beginner angel investors. I reviewed all the syndicates on the platform and selected the best ones you can apply for here.
2. Angel Investor Groups (accredited only)
There are over 250 registered angel investor groups in the United States. The Angel Investor Association provides a database you can use, and I’ve ranked the best ones to reach out to. Some are free to join, while others have a monthly or annual membership fee. The main benefits of joining a group are education, shared deal flow, and community.
3. Angel Investor Communities (depends on the community)
Several angel investor communities now allow investors the same benefits of angel investor groups – deal flow, learning, community, etc. – while also allowing them to invest as individuals. Some notable angel investor communities include First Round Angel Track, The Council, Hustle Fund Angel Squad, and the VITALIZE Angels. Like angel investor groups, some are free to join, while others have a monthly or annual membership fee. I ranked the best ones to join here.
4. Republic Dealroom (accredited only)
Republic Dealroom helps angel investors access private investment opportunities backed by top-tier VC firms. This is open to accredited investors only, and there is a $1K - $10K minimum investment, which varies depending on the deal.
5. Investment Crowdfunding (accredited + nonaccredited)
The top investment crowdfunding platforms are Wefunder, Republic, and StartEngine. Several smaller platforms also exist to focus on niche types of deals. You can join all of these for free. There is a $100 - $1K investment minimum, which varies depending on the deal.
Why do people start angel investing?
There are several reasons why people start angel investing.
The most common reason is to make money. Here is an example showing how much money angel investors made from Uber when the company went public. It’s one of the most lucrative angel investments in history.
Some people see angel investing as a networking opportunity. You get to meet founders building new companies and other investors who are co-investing alongside you.
Another reason people angel invest is to get more information. By default, you should treat all information you receive about a company as confidential, but you can use this information to your advantage. Angel investors are better at identifying technology and market trends, which can influence where they work, what they invest in next, and more.
What are the risks of angel investing?
Most investments fail. > 95% of startup investments go to zero. It’s a very risky asset class. Only invest what you’re willing to lose. You can think of it as a socially good lottery ticket.
Unlike the stock market, where you can sell your shares at any given moment in time, private companies have limited liquidity. You should assume you can only earn a return on your investment if there is a traditional liquidity event like an IPO or acquisition. AngelList, Carta, and a couple of other platforms are working on secondary market platforms, but these do not operate like a traditional stock market in that there is only demand for the ~top 50 companies at any given moment.
Angel investing is an insider’s game. The best startup investments are very competitive – with venture capitalists and mega funds trying to secure as much ownership as possible. As a result, deals you find open to the public on AngelList Syndicates and investment crowdfunding platforms tend to be the leftovers. There wasn’t enough demand to fill the round with insiders, so they opened it up to more people. There are some outliers, but typically, the best deals are reserved for the most high-signal angel investors who can add value outside of capital in the form of credibility, mentorship, connections, or expertise.
What to look for in companies before investing?
The most common mistake people make when they start angel investing is to invest in things they don’t understand. You should only invest in businesses where you know the fundamentals:
- What is the long-term vision?
- Why is this the best team to deliver on this vision?
- What is the business model?
- How do they make money?
- Who is the customer, and why do they need what they’re making?
- How do they acquire customers?
- How do they retain customers?
- Why do their customers choose them over their competitors?
- How big could this business become if everything goes right?
- What are the unit economics of their product or service?
- What are the critical risks associated with the business, and how do they plan to mitigate them?
- How has this company been funded to date, and will they need to raise more money in the future?
What are the best practices for angel investing?
When you start angel investing, remember the following:
- Invest in what you know
- Only invest money you are willing to lose
- Read the contract and terms closely before you invest
- Be helpful to the startups you invest in
- If you don’t know how to be helpful, then it’s best to stay out of their way
That’s it. You should be ready to make your first investment. Thanks for reading.
