Angel investors invest billions of dollars in thousands of new ventures every year. It is no surprise that more and more people are interested in getting into the industry. Many startup founders understand the challenges of developing business and aspire to become an angel investor. Being passionate about the ecosystem is crucial when becoming an angel investor.
I personally treat every win as a surprise and not assume I will guarantee my return on investment, playing it safe when appropriate, and taking risks when it’s a calculated portfolio approach. Before jumping into angel investing as a career, I suggest reading the rest of this article so you can get a better idea if this is the right fit for you.
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Who Can Be An Angel Investor?
An angel investor can be any business person with the right experience and an appropriate amount of capital. We will talk about accreditation, which touches on the need for capital in the next section of this article. According to the Business Development Bank of Canada, angel investors are a wealthy person who invests their own money in a company—usually, a startup—that is in the early stages of development. That means if you’re a past founder of a startup it can only be in your favor.
Understanding the stages of the funding process can only assist you when approaching the world of investing. That’s why I recommend past founders to explore the world of investing because you already understand the greatest challenges and opportunities founders face daily, which can only be an asset in this industry.
The type of experience you need varies from angel investor to angel investor. Some angel investors specialize in a specific portfolio based on their experiences. One commonality is a familiarity with the industry and experience working with large amounts of equity in their professional career.
1. Get Your Accreditation
In order to become an angel investor, you must be accredited. That means you need to meet the definition of investor by the United States Securities and Exchange Commission (SEC). SEC is meant to protect investors and promote a trustworthy marketplace. According to SEC, an angle investor must have an earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years. Otherwise, an angel investor can be accredited if they have a net worth over $1 million, excluding the value of your primary residence. Calculating your net worth can seem daunting, but check out this government site to assist you in this process. The government sets this requirement because, according to their calculations, this amount of earned income can withstand the loss of investment.
If you’re interested, investor.gov is a great resource to learn more about how to seek accreditation. Additionally, if you want to ensure the protection of your money, you can also use investor.gov’s database to learn more about your investment professional’s background, registration status, and more.
2. Do Your Research
If you seek to become an angel investor, you must create a proper organizational plan, like any other business, which involves research. Choosing this career path involves skill and knowledge of which companies to invest in, how much to invest, and how to fund these investments. In other words, research, research, and more research.
Becoming an angel investor means you enjoy a challenge because it does take a lot of research. I personally use the Angel Capital Associaton (ACA) when I want to connect with other angel investors and understand what other industry professionals in good standing are out there in the ecosystem. As well as, ACA contains organizations affiliated with them as well, which could serve as a resource to you when researching other groups that are doing similar work that you’re interested in.
3. Educate Yourself On The Risks
In order to become an angel investor, it is important to understand the risks. Although being an angel investor has its perks and rewards, both as being a mentor and advising role, and also financially viable to make a living, it still has its risks. Determining the appropriate risk profile, and understanding your limitations is key before getting started.
According to Dr. Robert Wiltbank and Dr. Warren Boeker’s research, angel investing might actually be worth the risk, statistically speaking. The risk taken by angel investors in the academics’ study proved to be rewarded with overall returns, an average of 2.6 x in 3.5 years. Regardless of past research, you need to ask yourself personal questions before heading into the industry, namely how much are you willing to lose? What are your limitations? After all, there is no guarantee that your endeavors will be successful.
4. Plan Your Portfolio
If you are going to take the path as an angel investor, it is best you plan accordingly. According to Tech Crunch, an angel investor should take a portfolio approach. Investing is risky like I said, but if you plan accordingly with those risks in mind, you can have a diverse portfolio that can withhold the shock of an investment gone wrong. The risky asset class, like early-stage startups and the entertainment industry, will likely lead to a complete loss on your investments, so you need to diversify.
Invest in companies that are viable and sound investments, to balance out your portfolio. Tech Crunch recommends building a portfolio of at least 15 companies and to limit the size of your angel portfolio to 10 percent of your investible assets. If you plan with risks in mind and diversify your portfolio, you can still invest in risky asset class investments.
If you are an expert in a field, use that to your advantage. Invest in the areas you are knowledgeable about. This is one of the many reasons I was drawn to the tech world. Being able to actually assist the trajectory of the company because of your knowledge of the industry can be very rewarding.
Another option is to invest as a group alongside other experienced investors. You can collaborate on deal screening, due diligence, and supporting the business post-investment as well. Not only does this share the load, but it also de-risks investing. Every deal you approach with other professionals is a different set of skills and perspectives that can bring about exciting changes and developments on your journey.
5. Start Building Relationships
It may seem obvious, but building relationships is crucial. Every angel investor is different in their approach, and subsequently have different communication approaches to establishing their network.
Remember, you’re not just an investor looking for a profit, you are consciously creating a community of influential business leaders. It is important not only to invest your money into upcoming business leaders but to invest your time into creating meaningful, longlasting relationships. Building longterm relationships will only serve you in the long run when conducting business in the future.
You can’t become an angel investor by yourself and without a strong, established network. One way to establish a strong network is by investing in a diverse network, meaning those with varying industries, ideas, and perspectives, which can only assist your career growth and potential (and your portfolio!).
6. Ask Your Community
LinkedIn is also a great source for you if you are in need of finding out more about the industry. All it takes is a simple direct message to an angel investor, and ask if they have the capacity to have a discussion with you about the industry.
Here are some great questions to ask an angel investor to explore the industry further to see if it’s right for you:
- What did you wish you knew about angel investing before you got into the industry?
- What were your greatest resources to educate you on the industry?
- Why was angel investing the right choice for you?
If you need more inspiration, consider reading my blog on questions to ask an investor.
Nowadays virtual conversations are becoming the leading way to conduct business meetings, but also networking opportunities. One way to expand your network is by hosting virtual coffee dates, so exploring this new industry might just take one or two virtual coffee dates. Getting familiar with the industry is a win-win, so why not ask questions to your potential new workplace community? It is important to find out and research prior to diving in.
7. Embrace Uncertainty
Despite many articles telling you how your journey is going to be, know that no path is going to be the same. You can become an angel investor and approach the industry in a variety of ways. Of course, you won’t be able to know what will occur on every step of your journey, but you can be prepared. As I mentioned, the importance of research and educating yourself on the path of becoming an angel investor can only prepare you for the future.
Your passions will guide your journey. If you are passionate about an industry, invest in it. You never know when a small investment can be a big pay-off later on. Your career will take unpredicted twists and turns undoubtedly, so plan accordingly. Every angel investor will approach their first investment differently, some choose to go solo, some choose to be collaborative. It all depends on your preferred working style. Some angels work best through doing, and some angels prefer mentorship. You decide your preferred learning style as you start your journey to become an angel investor. The scariest thing you can do is fail. And everyone fails. So don’t worry about that. Even if you fail, you will learn lessons on how to be a better, more supportive angel in the future. Every investment is a lesson to better your career and path as an angel investor.
The more expertise you get in the field, the more you will become the go-to expert in the field.
As I stated, the first step of the journey is to seek accreditation and to make sure you have the appropriate assets to become an angel investor. Educating yourself on the potential risks of investing is the key to creating a sound portfolio.
You can’t do this alone, which means tap into your network. If you don’t know any investors in your circle, expand your network. As I said, LinkedIn is a great tool to set you up for success in this regard. I know it can seem difficult at times, but asking your network for advice is crucial for success. Remember, no journey is the same, so get comfortable with uncertainty, but plan appropriately on your journey ahead. I hope this article assist you in better understanding the angel investing sphere, and what to expect when diving in. Perhaps one day you will be even advising others about funding in a crisis.
If you choose to become an angel investor, trust me, it will be rewarding both career-wise and in your personal life. Let me know if you have any insights on your angel investing journey in the comments below.
More About the Author
Jonathan Hung is a transformative Los Angeles angel investor and venture capital partner who believes in a bright future for businesses seeking to broaden their horizons in North America and Asia. One of the most active angel investors in Southern California, his mission is to drive value creation within each portfolio company. In support of this mission, he serves as Co-Managing Partner at – Unicorn Venture Partners – providing a hands-on approach to supporting companies by offering strategic expertise in operations management, finance, business development, multinational business strategy, entrepreneurship, networking, data analysis, and leadership.
Jonathan believes that every start-up/portfolio company regardless of industry and size can take full advantage of his genuine approach to mentorship. Jonathan specializes in early-stage investing and the formation of strategic business partnerships. He invites connections with any professional who shares his passion for the technology and consumer market sector, entrepreneurship, and venture capital.