Angel Investing 101: This Strategy Can Make You Millions

You don't have to be a genius or a millionaire to become an angel investor.

All you need is a little Angel Investing 101.

Angel investing is a huge profit opportunity, but it's still overlooked by many investors.

For many years, people have thought of it as exclusive to the tech geniuses of Silicon Valley. That's simply not the case today.

Long before Inc. (NASDAQ: AMZN) was an online retail giant, a group of angel investors supplied it with $50,000 each. This totaled 1% of the company at that time. Those $50,000 investments are now worth over $8.5 billion.

So in the last 25 years, those angel investors have seen returns of 17,000,000%.

But here's the thing: You don't even need $50,000 to be an angel investor today.

It's more like... $50.

We'll show you how in just a moment. Let's look at angel investing from the ground up.

Angel Investing 101: What Does "Angel Investing" Mean?

The term "angel investor" comes from the theater world. It started as meaning a wealthy person who would keep a theater production going by generous donations or underwriting.

The term has broadened and been applied to the financial world. Today, angel investors are very early-stage venture capitalists. They invest in startup companies before those companies go public on the stock exchanges.

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Often, startups need money to expand or stay afloat. They use angel investors to obtain seed capital. In exchange for their investments, angel investors own a stake in the startup.

Angel investors get to own a part of the company before it even trades on a stock exchange. In addition, they may receive preferred stock or convertible bonds rather than the equivalent of common stock.

But there's a difference between an angel investor and a venture capitalist.

First, angel investors put money in companies at an earlier stage, usually when the valuation stands at under $5 million. And it's before the company has the ability to scale. When a startup hits more than $5 million in valuation, it's then time for venture capital.

The second key difference is that venture capitalists congregate in venture capital firms. These are large enterprises. But angel investors can often work alone. They can exclusively work on what interests them, which is part of what makes angel investing so compelling.

But it does carry some risk. Here's how you can stay on your toes...

The Risk-Reward Profile of Angel Investing

Because the companies are small startups, angel investing carries more risk than buying stock on the New York Stock Exchange or the Nasdaq. Startups are never guaranteed success, and in fact, a high percentage fail.

In exchange for this higher risk, though, the potential rewards are much greater.

Money Morning recommends that investors follow a portfolio allocation model called the 50-40-10. This places 10% of a portfolio in speculative investments, including angel investing.

In a 50-40-10 model, the majority of the portfolio is placed in defensive and growth investments that will provide consistent and reliable returns over time.

The strategy is very different for angel investors. Stocks are expected to return around 10% annually on average. But an angel investor aims for just a few investments with extraordinarily high returns - 1,000% or more.

Some, due to the risk profile, will likely be losers. But the skyrocketing potential increases of the winners make it worthwhile.

The prudent angel investor will place small investments in a number of startups rather than only a few.

Now, you're almost on your way to beginning your angel investing journey. But first, every aspiring angel investor needs to watch out for two things: stock dilution and when to exit.

How to Know Angel Investing Is Profitable for You

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Stock dilution can occur with any equity investment. Companies sometimes issue new shares.

If you invest before they do, the new issue may result in your owning a smaller percentage of the company. That smaller percentage is one form of dilution, but it has no impact on you financially. Your shares are still worth the same amount of money.

But it is possible for certain forms of stock issuance to actually reduce the dollar value of existing shares, rather than simply the percentage owned.

Pay attention to your rights vis-à-vis new stock issues. If the dollar value could be diluted, you don't want that investment.

Another important - and sometimes related - factor is deciding when to exit.

As with any equity investment, including stocks, angel investing gains exist only on paper until you sell some of the investment.

While it may be fun to watch your angel investing stake soar, you also want to be sure you're making actual money.

You need set an exit point when you go in (this is also called a liquidity event). When your exit point occurs, you sell some or all of your stake for cash.

In many instances, your exit point may be the initial public offering. Startups backed by angel investors sometimes go public. And when they do, angel investors stand to make piles of money.

Money Morning typically doesn't recommend IPO investing for retail investors. That's because the excitement of an IPO often bids up the share price before the shares are available to retail investors.

But if you're an angel investor, you're on the other side. You benefit from the climbing share price that accompanies an IPO.

In other cases, an acquisition can be an exit point. Startups with great products are often bought by other, larger companies in the same business.

So the question remains: What are the right companies?

You get to decide that.

Here's how you can start angel investing right now...

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