How to Become an Angel Investor

Becoming an Angel Investor

Angel investing can offer a large “payday” for those that can put in the time and energy to find promising startups. As an investor, you can tap into a business that can rapidly scale to become a leader in an industry. But how do you get started as a first-time angel investor?

How to Become an Angel Investor

Once you learn how angel investing works, you can decide if it’s the right opportunity for you.

1. Decide If Angel Investing Is Right For You

Angel Investing entails a high level of risk and uncertainty – with the potential of very large returns. Angel investors invest their own money into startups in their earliest stages. Prior to the angel funding “phase”, the funding available to a startup is typically from the founder(s) and through friends, family, and acquaintances of the founder(s) or executive team. Startups in this early “seed” stage have the highest chance of failure.

Angel investing for those without a personal relationship with the startup’s founder is legally limited (regulated) to accredited investors who:

  • Have a net worth of more than $1M or have an annual income of over $200,000
  • Are willing to take great financial risks for very high returns
  • Are passionate about the startup’s offer and market
  • Have former business executive and leadership experience
  • Have an interest in mentoring entrepreneurs and holding them accountable
  • Have an interest in the latest investing trends
  • Are passionate about startups
  • Have owned or been a part of a startup earlier in their career

2. Ensure You’re Qualified to Be an Angel Investor

Not every investor can be a qualified angel investor. To qualify as an angel investor, one must meet the following “accredited investor” qualifications:

  • Have a net worth of $1 million or more – outside of their primary residence
  • Have an income of $200,000+ (or $300,000+ as a couple) for the last two consecutive years
  • Are a general partner, director or executive for the issuer of the securities funding the startup

 

There are Security Exchange Commission (SEC) programs that permit non-accredited angel investors (who are not known personally by the founders) to buy stock or ownership in private start-up companies. It’s called “equity crowdfunding” and was part of the 2012 “Jobs Act”. This program was put in place to democratize or broaden the opportunity to invest — and to allow startups to solicit investments from a larger population.

However, the SEC regulations for crowdfunding are cumbersome and compliance is expensive for startups. Proceed with caution in equity crowdfunding opportunities in angel investing and note the differences between buying a product through crowdfunding versus buying equity (stock or a percentage ownership) through crowdfunding.

3. Understand How Angel Investing Works

How does angel investing work? Here are the basics:

Angel investors choose startups to fund.

Angel investors typically come into the funding picture after the founder’s initial personal investment together with their family members, friends and acquaintances provide initial funding. Angel investors find “investable” startups through networking, angel groups, and other local or virtual methods. Once an angel finds an intriguing opportunity, they perform due diligence to determine a value for the company. The angel then comes to terms with the founders and finally makes an investment.

Angel investors provide support and mentoring.

As the startup is building their product, their market, hiring key staff members, raising additional capital, and edging closer to becoming a viable, high-growth company, an angel investor will help the founder(s) and executive team with connections in their network, in making sound business decisions, and in avoiding the pitfalls of startup companies.

Angel investors cash in.

If the startup succeeds, it can become a candidate for acquisition or an initial public stock offering (IPO). This juncture, called a liquidity event, is where angel investors will sell all or some of their share of the company.

Angel investing has attracted many new participants in recent years. Investors are attracted to the potential of big payouts, mentoring opportunities, and the deep connection to the local community it offers.

Like other forms of investing, angel investing can be challenging to learn about. With its popularity, there are numerous training sessions, conferences, networking groups, forums, and angel investing groups you can join. Many cities and states have local associations that can identify startups for angel investors.

4. Learn How to Find and Look at a Pipeline of Potential Investments

Because angel investors invest their own funds in a startup, where there is a high risk of failure, investors expect high returns. Expectations are, at the lowest levels, 10 percent over 5 years. Generally angel investors look for startups to have a realistic potential yield of 20-30 times their investment in 7 years or less – if the founders can execute.

The industry the startup plans to enter can provide a further sign about its chances of a good return. According to the “Halo Report”, the following industries attract the most angel investors: internet, healthcare, mobile and telecom, energy and utilities, electronics, and consumer products and services.

There are many startups asking for investment and it can be overwhelming deciding which ones are a good fit for you – and which have the best chance of success. Fortunately, there are angel investing associations that can supply you with a list of local startups to look into. These associations often vet their members and the startups they have connections with.

Angel investors choose startups to fund.

Angel investors typically come into the funding picture after the founder’s initial personal investment together with their family members, friends and acquaintances provide initial funding. Angel investors find “investable” startups through networking, angel groups, and other local or virtual methods. Once an angel finds an intriguing opportunity, they perform due diligence to determine a value for the company. The angel then comes to terms with the founders and finally makes an investment.

Angel investors provide support and mentoring.

As the startup is building their product, their market, hiring key staff members, raising additional capital, and edging closer to becoming a viable, high-growth company, an angel investor will help the founder(s) and executive team with connections in their network, in making sound business decisions, and in avoiding the pitfalls of startup companies.

Angel investors cash in.

If the startup succeeds, it can become a candidate for acquisition or an initial public stock offering (IPO). This juncture, called a liquidity event, is where angel investors will sell all or some of their share of the company.

Angel investing has attracted many new participants in recent years. Investors are attracted to the potential of big payouts, mentoring opportunities, and the deep connection to the local community it offers.

Like other forms of investing, angel investing can be challenging to learn about. With its popularity, there are numerous training sessions, conferences, networking groups, forums, and angel investing groups you can join. Many cities and states have local associations that can identify startups for angel investors.

5. Learn How to Conduct Due Diligence

Angel investing involves individuals investing in one or more startups at their earliest stages – where the probability of failure is highest. Before one becomes an angel investor for a startup, thorough due diligence must be conducted.

Due diligence involves the investigation and evaluation of the startup and its founders before funding. It looks at the market size, use of funds, technology, intellectual property, founder experience and character, the risks involved in investing in a particular startup, plus much more. Angel investing groups require that investors conduct due diligence before they make any funding decisions.  This work is typically done by a subset of the angel group.

To help you in your due diligence in deciding to fund an early-stage startup, download StartUpNV’s How to Invest in a Startup Guide.

6. Decide the Way You Want to Invest as an Angel

There are different types of angel investors. Below are summaries of the common types of angel investors:

Value-Oriented Investors – These investors bring extensive business experience to new startups.

Partner Investors – These types of investors invest in one startup at a time and seek to become heavily involved in its operations.

Barter Investors – These investors offer goods and services instead of finances.

Socially Responsible Investors – These angel investors look to support startups that address their social needs.

Regardless of what type of angel investor you consider yourself, there are two main investing methods they use.

The Benchmark Method

The Benchmark Method or Scorecard Method assesses the pre-revenue value of a startup based on the outcomes of similar businesses in the same industry or location. A benchmark is made based on the average value of similar companies and includes:

  • How strong the executive team is
  • The size of the business opportunity
  • The startup’s main product or technology
  • How competitive the business environment is
  • The amount and urgency of the need for capital

 

Each benchmark is then measured on a 0-100 scale.

The Berkus Method

With the Berkus Method, the value of a startup is assessed by certain value drivers. These drivers include:

  • The soundness of the startup’s business idea
  • The quality of the company’s prototype
  • The strength of the management team
  • The quality of the startup’s strategic market relationships
  • The profitability of existing product sales

 

Angel investing is a great investment strategy for investors who don’t mind high risks in exchange for a high payout potential. Because of the high level of risk and uncertainty, angel investing isn’t for everyone.

If you’re ready to take the next step and become an angel investor, let StartUpNV help. We’ve helped angel investors make investments in successful startups and can introduce you to others. We also have a variety of useful resources to help make you a successful angel investor. We’re dedicated to serving as an incubator for the Nevada angel investing community and can help you successfully navigate it to find the opportunity of a lifetime.

Why Las Vegas?

Nevada is an amazing place for businesses due to the lack of state income tax and lower barriers to entry. People are moving to Las Vegas in droves due to economic opportunity coupled with low costs of living. Big companies are setting up additional headquarters here. It's a world-class city with emerging opportunity.

 

In the past...

 

Las Vegas has had great success in gaming, tourism, and mining. However, diversifying the industries that thrive here is important to making this community more resilient. Especially after 2008.

 

In order to do that, we have to support entrepreneurs and startups right here. Therein lies the problem: There's 1400 incubators in the United States. Guess how many are in Nevada? Zero.

 

And if anybody wants money, they have to go out of state for that.

The goodness that comes out of investing
affects the entire region.

In our case, it affects our entire state.