However, sprouting those angel wings and taking flight takes some effort. In our latest #BackToBasics blog, let's explore how to develop the skills, connections, and financial capacity to become an angel investor. We will also look at accreditation and how much money angels typically devote to their portfolios. Let's go!
Spread Your Wings: How to Start Angel Investing
Step one on the path to being an angel investor is knowing the whys and the hows. Consider the following:
Are You Financially Prepared
The potential for returns are mouthwatering. Yet, angel investing sits comfortably at the higher end of the risk spectrum. Therefore, please ensure you have adequate "risk capital" beyond your retirement savings and emergency funds. If you’re not ready, stick to other classic investments.
A 2017 ACA study showed that only 11% of an angel investor’s portfolio yielded positive returns. While this statistic is a window into the high risk factor, common wisdom shows you only need one big winner to make angel investing worth your while. The potential for ROI on your winning horse is literally sky high. While the whole point is to get higher returns than traditional investments, angels need to prepare mentally and financially to face setbacks. Weaving such a safety net is made possible by accreditation. More on that later. For now let’s answer the more fundamental question: how do you become an angel investor?
Define Your Motivations
Take time to examine why you want to angel invest and what you hope to gain other than financial returns. Keiretsu Forum member Bill Powell spoke to us about finding the ‘sweet spot’ and exploring one’s niche. Do you think you can add strategic value via relevant industry expertise and connections? Or are you passionate about a certain technology or cause?
Angel investors often place bets on the crazy ones before anyone else does. The intangible rewards make it that much more appealing: think of it as giving back to the ecosystem. We all know angel investing is a way to find (and fund) the next big thing, but angels could simply love the thrill of shaping a groundbreaking company from scratch.
Ask yourself:
- How active or passive do I want to be as an angel?
- What business models, sectors, and products intrigue me?
- What types of founders do I want to sponsor?
- Can I wait patiently for exits?
So you’re clear on your angel investing philosophy and you’re financially robust. Great! What’s next? Let’s start executing on your plan.
Tap into Investor Group
Angel investing is hard but it doesn’t have to be impossible! If you’re starting out as an angel investor, you could join a top global angel group. Keiretsu Forum offers a structured approach to fundraising and exceptional membership support. By joining, you gain access to thoroughly vetted deal flow and can leverage shared due diligence. Co-investing also mitigates risks compared to going solo. Such arrangements facilitate portfolio diversification and shared learning.
Most importantly, angel groups will include members with decades of entrepreneurship, finance, operating and investing experience.
Learning the craft alongside these qualified experts provides insider perspectives you won't find in textbooks. Speaking of perspective, an old proverb says “Measure thrice and cut once”. Our next step will make the investigative framework of angel investing clearer.
Starting Small and Doing Due Diligence
Early-stage investing requires both analysis and instinct. It's a tightrope walk and a daunting one at that. Angels become inactive quite early because of how hard it can be to make those leaps of faith! We suggest you start cautiously when starting as an angel investor. Conduct extensive due diligence before investing in any company. Data shows that more due diligence leads to better ROIs. You could also review marketing strategies, vet technology/IP and examine exit plans via due diligence. But remember: the team and founder may matter more than the business model at the early stage. At Keiretsu Forum we spend significant time assessing integrity, coachability, and leadership authenticity.
Moving on, you also need a framework to guide your angel investing strategy.
Define Portfolio Goals
Given risky investing terrain, some baseline objectives need to be set for your portfolio:
- Target return rate for realized exits
- Acceptable loss percentage across holdings
- Average expected hold period before liquidity events
Outcomes for individual startups prove unpredictable. However quantifying goals creates accountability markers to evaluate strategies over multi-year periods. We suggest you always course correct tactics if portfolio-level metrics lag benchmarks. And coming to the last piece of the puzzle....
Stay Consistent
As Bill Powell reminded us, “We invest regularly because we never know which vintage years are the best ones. For the last 23 years or so I've been focusing on regular size allocations that fit with my portfolio.” Angel investing promises exhilarating highs but also has the potential for lows that test conviction. Maintaining realistic return expectations is crucial. Frame guidance as open-ended questions and approach the journey as a partnership built on transparency and trust. You could even set aside dedicated time every week to assist ventures as needs ebb and flow. Consistent positive contribution seeds goodwill that pays dividends for years to come.
Now that you have a foundational understanding of what it takes to become an angel, we'll talk about a detail many prospective angels may have questions on... accreditation!
Who Are Accredited Investors?
Accredited investors are individuals or institutions that meet certain SEC benchmarks based on income, net worth, or professional credentials. This designation provides access to complex and higher-risk investment offerings that everyday investors cannot access. Accreditation helps you become an angel investor with wider opportunities.
Individuals can qualify by either:
Earning $200K+ annually ($300K jointly with a spouse) across the last two years, expecting the same current year
OR
Holding over $1 million in net assets, excluding primary home and associated liabilities
So why chase accredited status given the high-risk factor? By qualifying, you can unlock the following benefits:
Higher Potential Returns
Accredited investors enjoy more options to back private companies early and capture steep valuation appreciation well before IPO debuts and public listing.
Less Regulation
Public companies face extensive filing, compliance and disclosure regulations around financials, organizational structures etc. Private companies face minimal mandatory reporting allowing more flexibility to operate, experiment and scale before public scrutiny.
As we can see, accreditation is the key to being a stable and capable angel investor. So how do you know if you qualify as an accredited investor?
How to Get Accredited Investor Status
There is no official accreditation process for investors in the USA. Instead, angel groups or VCs must verify if you are accredited and seek the requisite proof from you. Here's what you need:
1. An annual income consistently above $200K (or joint spousal income exceeding $300K) across the previous two tax years via W-2 forms and returns. It helps to assert a reasonable expectation of earning the same current year.
2. Assets minus liabilities topping $1 million, excluding primary residence value and associated debts/mortgages. For example, retirement accounts, non-home real estate, insurance cash values and equity instruments apply. High net worth apart from property ownership does the trick.
3. Professional certifications that satisfy thresholds like Series 7, Series 65 or Series 82 brokerage licenses. Consult tax planning and wealth experts to ensure you satisfy accredited benchmarks before deploying hard-earned capital into exclusive illiquid offerings. And carefully weigh if such speculative, high-octane investments truly match your risk tolerance and portfolio objectives with professional guidance.
If you’re good on all three points above, congratulations! You’re well on your way to becoming an angel investor. Which leaves us with one last question...
How Much Money Do You Need to Be an Angel Investor?
Is it fair to say you need a lot? Yes! On a more serious note, while anyone can theoretically be an angel investor, participating meaningfully requires substantial capital and an extensive timeline. Here are realistic expectations to set. The majority of active angels may invest $25K to $150K per company. Full-time angels could invest $500K to $1M+ annually. Needless to say, these figures are provisional (given the secretive nature of the work!)
Angel investing represents just one asset class within a balanced portfolio.
You might want to limit startup allocations to <10% of liquid net worth when first starting. Embrace a flexible, risk-tolerant, and entrepreneurial mindset as well. Given the risk, you could allocate funds you won’t need for 5-10+ years. The lifecycle doesn’t fit most short-term capital needs as angels also commit time for mentoring, network connections, industry expertise, and other value-added support.
In summary — being an angel investor requires not only fiscal firepower but a good dose of patience, a fabulous network and a healthy risk appetite. These will help you play a crucial role in backing promising upstarts before they take flight into runaway successes. Keep your eyes on the prize and enjoy the rollercoaster and dizzying highs. That’s how you become an angel investor!
In part 2 of our #BackToBasics blog series on "How to Become an Angel Investor" we'll look at deal flow and how angels can source deal flow! Stay tuned.
Sources:
https://www.indeed.com/career-advice/finding-a-job/how-to-become-an-angel-investor
https://money.usnews.com/investing/investing-101/articles/how-to-become-an-angel-investor
https://www.vitalize.vc/blog/angel-investing-playbook/
https://www.investopedia.com/articles/investing/092815/how-become-accredited-investor.asp
https://fastercapital.com/content/How-Much-Money-Do-angels-Really-Invest-In-Startups.html
https://www.goingvc.com/post/want-to-get-started-as-an-angel-investor-read-this
