How to Become an Angel Investor
Are you wondering how to become an angel investor? We have all you need to know.
This article will answer:
- Who can be an angel investor.
- How to become an angel investor.
We already know what angel investing is, so let's start by identifying what an angel investor is.
An angel investor is someone who invests in early-stage businesses called startups. Often, the startups initially raised money from friends and family and are now looking for additional funds to fuel their growth.
To obtain these funds, the company's leaders turn to angel investors. In many cases, the startup seeks investment dollars and guidance from angel investors.
Angel investors have many backgrounds but are often entrepreneurs, doctors, lawyers, and people who work in the finance industry. The federal government has requirements someone must meet to become an angel investor.
Before we go over the requirements to become an angel investor, here's how angel investing works.
Being an Angel Investor
The Small Business Administration estimates that in 2019, 275,000 angel investors invested in 30,000 companies in the United States.
Most angel investments range from $25,000 to $50,000 per company. Some angel investors invest as little as $5,000. Others put even smaller amounts of money into a startup in what's called micro angel investing.
An angel investor invests in a startup in exchange for an ownership stake in that company. The investor doesn't charge interest as they would if they made a loan to the business.
That means a startup gets cash to fuel its growth without taking on debt. And an angel investor receives an impressive return on their investment (ROI) if the company does well.
That ROI usually comes via one of two events:
- The startup goes public via an initial public offering (IPO) of its stock, which often generates large amounts of cash for the company and its angel investors.
- Another business buys the startup, frequently paying angel investors much more than their initial investment.
One example of a startup that produced incredible ROI for its angel investors is Amazon.
Early in its history, Amazon's founder, Jeff Bezos, raised $10,000,000 from 20 investors. Those investors' initial Amazon investment is worth billions today.
Many startups don't reach these ROI events. Analysts say about 10% of angel investments generate positive returns for investors, meaning that 90% fail.
But when a startup does make it to an ROI event, the returns are often more than large enough to cover an investor's other failed investments.
Being an angel investor frequently means much more than investing money. Many startups want investors who can mentor and guide the company on its path to profitability.
That's why many times, a startup's angel investors have experience in the business's industry. Or perhaps an investor's professional background or personal connections make them a valuable strategic partner for the company.
Being an angel investor comes with risk and, in many cases, responsibilities. But angel investing also produces impressive returns. You can also read more about angel investment opportunities risks and rewards.
OK, now let's find out how you can become an angel investor.
How to Become an Angel Investor
There are two general types of angel investing.
Accredited investors put large amounts of money into a company, often amounts at or over $1 million. There's also micro angel investing, which involves angel investing with $50 or less.
Accredited investors are recognized as such by the U.S. Securities and Exchange Commission (SEC). The SEC lets these investors buy and sell unregistered securities.
To sell shares on a U.S. stock exchange, a company must register with the SEC.
Angel investing is buying ownership shares of a company that's not registered with the SEC. Companies that aren't registered aren't required to file the same financial documents and reports as companies with publicly available stock.
Without these financial documents, the SEC sees angel investing as being riskier than dealing in publicly traded securities. To protect people from that risk, the SEC regulates who can be an angel investor by requiring them to be accredited.
To be an angel investor who's accredited, you must meet the following requirements:
- Have a net worth of $1 million or more, excluding the value of your primary residence.
- Have earned an income of at least $200,000, or $300,000 if combined with your spouse, for the past two calendar years.
- Demonstrate that you reasonably expect to maintain that level of income in the current year.
If you meet these requirements, you can register with the SEC as an accredited investor. Once you receive your accreditation, you're able to be an angel investor.
Of course, many people aren't able to meet the SEC's accredited investor requirements. But that doesn't mean these folks can't become an angel investor.
Let's go over micro angel investing.
Angel Investing with $50
In 2012, U.S. President Barack Obama signed into law the Jumpstart Our Businesses Startups (JOBS) Act.
The JOBS Act covered many areas. One part of the law opened the door for micro angel investing.
Because of the JOBS Act, someone who doesn't meet the accredited investor requirements can become an angel investor through crowdfunding.
Crowdfunding is when people pool their money to fund a cause. Equity crowdfunding, or micro angel investing, is when that cause is a startup.
Micro angel investors can still receive equity, or ownership shares, in a startup in which they invest. But their stake is less than it would be if they put in more money.
Sometimes, businesses give micro angel investors something other than equity. For example, a company that produces a physical product might guarantee its micro angel investors a certain number of what it makes in exchange for their investment.
Many websites support micro angel investing.
One of those websites is the Angels & Entrepreneurs Network. Started in 2019, the Angels & Entrepreneurs Network enables anyone to become an angel investor.
This site has three membership levels. Members get monthly micro angel investing opportunities to consider that don't require having tons of cash to invest.
Be an Angel Investor
Being an angel investor is fulfilling in many ways.
You're in a position to help a company grow. And you can receive impressive financial returns.
There are two ways to become an angel investor.
If you meet the SEC's requirements, you can become an accredited investor. That accreditation gives you access to investment opportunities unavailable to most people.
But even if you don't meet the SEC's requirements, you can still become an angel investor. Crowdfunding makes angel investing with $50 or less possible.
The answer to who can be an angel investor is, in most cases, anyone.
