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Do you read stories about people who retire early and wish you were one of them? You can be, with online angel investing.
Angel investing is when you invest in the very early startup stages of a company. Angel investors supply seed money for growing companies that need cash. But, the companies aren't public yet. So, you can't purchase them on the stock exchanges.
Startups are often very exciting companies with new products or services. Investing in one that hits a home run can set you up for retirement.
Just look at the early days of Amazon.com (NASDAQ: AMZN). In the 1990s, Jeff Bezos founded Amazon as an online book store. One of its selling points was that customers could find books they may not be able to find at the local bookstore.
It didn't sell any retail categories other than books, and it certainly wasn't the household name it is now.
In those early days, Amazon needed money to stay afloat.
Fortunately, 22 angel investors signed on. And many of them were family and friends of founder Jeff Bezos. Each put in $50,000.
Back then, that was 1% of Amazon.
Frankly, it may have seemed dicey to some of them. The Internet and the idea of online purchasing were still very new.
Nowadays, each of those $50,000 investments are worth more than $8.5 billion. That's a wildly successful angel investment, to say the least.
In fact, it's a return of 17,000,000%.
That's the kind of windfall you could see with angel investing.
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But maybe you don't have $50,000 to spare. Fortunately, you don't have to. And we're going to tell you how you can become an online angel investor for as little as $50.
Here's what online angel investing is all about…
What Is Online Angel Investing?
Angel investing was originally a term for wealthy backers of theatrical productions. These angel investors would keep a play going through personal donations or underwriting.
Then, the investing world adopted the term. Startups needed wealthy backers before they could apply for an initial public offering (IPO).
In exchange for their backing, angel investors own a part of the company. Online angel investing offers an equity stake through stocks or convertible bonds.
Eventually, some angel investors become venture capitalists.
And you may have heard of venture capital before. Venture capital is the later stage of angel investing. Angel investing is needed when companies are valued at less than $5 million. When they're valued over $5 million, venture capitalists come into the picture.
Yet, venture capital tends to come from venture capital firms. These are large companies that provide guidance and expertise as well as capital infusions.
They want to see startups brought public. Angel investors, by contrast, often work alone. They invest in interesting projects.
And this can make angel investing a lot of fun.
Online Angel Investing and Risk
Investors should know that online angel investing is speculative. Small startups can have great successes but are not guaranteed to succeed.
And, typically, there is more risk in startups than in established companies. But the possible rewards are also crazy high.
So, we suggest the 50-40-10 trading strategy. This means that 50% and 40% of your portfolio are in defensive and growth investments, with consistent long-term returns. The 10% is for speculative, high-risk investments. That includes angel investing.
Now, angel investors don't expect every pick to be a winner. There is a high failure rate for startups.
Instead, they place money into several startups. They want very high percentage returns on some, and they know others will likely lose money.
But the soaring returns of successful angel investments could make for a very profitable online angel investing portfolio.
What You Need to Watch for with Online Angel Investing
There are two major potential issues with angel investing. One is stock dilution. Small companies can sometimes plan for a new stock that dilutes the shares of the existing stock.
That's okay if your dollar value remains the same.
But some stock issuance is made for control of the company, and some shares are worth more. If that happens, the dollar value of your shares might be hurt.
That's a sign you should walk away.
The other issue investors need to be aware of is the need for an exit strategy. Just like other equity investments, angel investors don't see gains until the equity stake is sold.
The same is true of stocks and even your house. Appreciation is on paper only until the asset is sold.
So, when you buy as an angel investor, you decide when you sell. Don't be tempted to hold for longer.
The exit point may be the IPO. People participating in online angel investing can benefit from IPOs because stocks in demand rise in price before them.
It's very different than investing as a retail investor after the IPO, when you may see a falling stock as the excitement cools down.
A buyout of the startup can also be an exit point. Buyouts by larger companies are great for small startups.
Now that you know the risks, here's how you choose an angel investment.