Why and How Can I Become an Angel Investor?
Stories abound about how folks who invested 5000 dollars in Google made 20 million or more. What people don’t understand is that these were not their one-off lottery ticket, but focused investments in some of the best minds that investors/angels in the founders' inner circle knew about very early.
A 20,000-dollar investment in the angel round would now be worth around 40 million dollars - CNBC https://www.cnbc.com/2014/06/06/uber-makes-early-investors-rich.html
Generally, people start investing due to their personal story/experience or after being attracted by these kinds of headlines. Whatever your path to enter the angel investing space, just know that everyone learns from their inevitable mistakes, and those who persevere get the chance to participate in wealth-building opportunities as well as help founders with their vision.
Is it Right for You?
First, you need to assess whether angel investment is the right space for you. Do you want to allocate a portion of your portfolio to angel investment? When done right, with a bit of luck, angel investment can lead to life-changing, generational wealth. But although you’re looking for a huge, positive outlier outcome, you should always be prepared (and able) to lose everything you allocate to this asset class in the event of an outlier negative outcome. If you can develop this mindset, have patience and invest accordingly, this may be a good avenue for you to pursue.
Time Frame
The waiting period for investments to mature is between five and 10 years, with some founders taking more than 10 years to have a liquidity event. However, in somewhat rare cases, the founder will receive a good acquisition offer and decide to sell early.
Allocation Percentage
Allocation percentage is the first step. I recommend a five- to 20-percent allocation based on your risk appetite. In the past, individuals were required to commit 25,000 dollars or more per investment, but now you can start with a one thousand dollar minimum directly with the founder (through AngelList RUV, which we’ll learn more about later) or a syndicate.
Frequency
A good practice is dipping your toes in with five to 10 investments a year and doing it consistently for five years until you have a portfolio of 25 to 50 firms. That way, you’ll have spread your investments across different themes and founders over time. As with anything, learning, practicing, and participating will expose you to a wide array of deals, frameworks and networks.
How Do You Start?
Unless you have the right connections, the passion and time to reach out to different founders at tech hubs, and the ability to pick the right deals, you’ll need to find someone who has been doing this kind of investing for years and has developed both the ability to choose sound investments and to build strong connections in the ecosystem. Learn about various syndicates on AngelList, reach out to leads with a good track record in areas where the thesis resonates with you, and be open to experiment with new, emerging leads.
Or, another path is if you have large checks of 25,000 dollars or more, you could become an LP for a fund and let Fund Lead take care of deal flow and due diligence and manage the investments’ life cycle.
Requirements
To be an angel investor, you must meet one (or both) of two criteria: financial and/or knowledge.
Financial
You should be an accredited investor. To qualify, you must currently have made at least $200,000 in personal income (or $300,000 in combined income) over the past two years and expect the same or higher income in the current year.
People with a net worth of more than one million dollars singly or with their spouse, excluding the value of their home, also qualify.
Knowledge
Learn and pass the Series 65 certification to get licensed.
Licensing enables you to angel invest and participate in AngelList syndicates.
In the following article, we’ll go through an investment framework.
Even the most experienced and knowledgeable people in the VC industry have struggled to choose the right opportunity and founders, and it won’t be any different for you. However, the greatest and most productive investors owe their success to their ability to stay humble, ask for help, learn from others, and co-invest to improve their odds. We’ll do the same here together!