Investing can be both easier and less scary than it sounds. There are many ways to begin investing, even if you do not have stacks on stacks of cash in the bank. Everything from dabbling in real estate via online real estate crowdfunding to getting acquainted with the stock market via apps like Robinhood can be modes of entry into the investing mindset for beginner investors. However, another, lesser-known but exciting and potentially very lucrative option exists for neophyte investors with the means to partake: angel investing.
Angel investing basics
Simply put, angel investing is a type of investing wherein individuals—the eponymous “angels”—help fund start-up ventures and early-stage small businesses. In exchange, angel investors get shares or equity in the new company. To find out more about angel investing vs venture capital, the latter of which involves larger investments in later-stage businesses, just follow this link.
What to know before starting to angel invest
If you’re currently considering becoming an angel investor, it is important to familiarize yourself with the federal regulations surrounding angel investment. According to the rules set in place by the U.S. Securities and Exchange Commission (SEC), to become an accredited angel investor in the US., you must have a net worth totaling one million US dollars or make and expect to continue to make $200,000 per year. You should also make sure to diversify your investment portfolio, as it is best not to rely on angel investing as a primary investment type.
Benefits of angel investing
One of the most attractive aspects of angel investing is the potential to see huge rewards in exchange for comparatively little skin off your back. Another, less concrete but no less real, pro is that, as an angel investor, you get to be an integral part of someone’s dream. And, hopefully, you will also have a front-row seat to seeing that dream become a reality. On a related note, as an angel investor, you’ll have direct access to the budding business’ leadership, meaning that you can help guide their decisions and help them achieve success, thereby getting a return on your investment.
Drawbacks of angel investing
Perhaps the biggest and most obvious drawback to angel investing is the degree of risk involved. According to Money Morning, “But when researching angel investment opportunities, choosing the best startup companies to invest in may be tricky due to the risk involved. After all, research shows that about nine out of ten startups fizzle prior to achieving successful gains.” Given that around 90% of start-up businesses fail, you are very likely to lose an investment at some point. That said, even if you’re not naturally a huge risk-taker, this fact alone should not necessarily dissuade you from investing if angel investment seems right for you based upon other factors. The second drawback of angel investing is that, even if the financial loss of your investment does not affect you greatly, it can be frustrating to watch businesses you’ve been involved with fail, especially if it happens repeatedly.
While there will inevitably be plenty of chance and luck involved in the start-up world, angel investing does not have to be a total shot in the dark. One strategy that angel investors typically use is to diversity their angel investments, both across asset classes and within them. If possible, shoot for more than 10 investments. It is always a good idea to maintain very good relations with the executive leadership of the company and to make sure that you have the technical expertise to keep up. Another set of strategies are to keep close watch over the deal terms and, especially if you are on the lower end of the net worth spectrum, to take an active role in the company, perhaps even acting as its chairman.
Angel investing may not be for the faint of heart, but these types of investors are called angels for a reason! They—and, perhaps one day, you—are the real movers and shakers of this world.