April 24th, 2019

How To Become An Angel In 8 Steps

At Female Funders, we’re all about empowering more women to become early-stage investors. Becoming an early-stage (or angel, if you meet the accreditation requirements) investor is not only a way to support innovative entrepreneurs, it’s also a way to potentially make financial returns. If directly investing in startups seems like a far-fetched idea, keep reading to learn more about how people actually get started as angels — and if taking this step is right for you.

Executive Director of the Angel Capital Association, Marianne Hudson, sees eight main steps to starting off as an angel investor. They are:

1) Accreditation

To be considered an “accredited” angel investor, you must have an annual income of $200,000 or a net worth of at least $1 million (not including your primary home). Not all early-stage investors must be accredited angels, but companies that raise money from accredited investors are exempt from many securities filings with the SEC and state securities regulators — meaning the large majority of equity fundraisers look for capital from accredited investors.

2) Know the Risks

Investing in startups can be rewarding, and it is also risky. Research shows that more than half of all angel investments lose some (or all) of their money. The same research also shows that it IS possible to develop a superior return, especially when a portfolio approach of angel deals and good practices are used. The key question to ask yourself is, “How much am I willing to lose?” Be realistic: Make sure your own risk profile is a fit for angel investing, or it may not be the right asset class for you.

3) Do Your Research

As early-stage investing becomes more well-known, plenty of experienced angels who’ve made good returns have collaborated on, or contributed to, materials to help others develop their angel skills. Visit ACA and other sites with links to videos, books, articles, and blogs. Attend workshops and events, where you can meet entrepreneurs, watch pitches and get a sense of your interests and the questions investors ask to assess a deal. Consider taking a deep dive into an educational accelerator course like Angel Academy, which pairs experienced investor mentors with would-be angels for one-on-one advising.

4) Ask for Advice

Part of the angel-investing culture is centered on asking questions — there’s just so much to learn! Asking questions of experienced investors provides a jump start in developing relationships and building your angel network for investing together in the future. It’s also a great way to get practical suggestions you can implement immediately.

5) Join an Angel Group or Platform

Angel groups, clubs, networks, funds, and platforms of angels are a great way to watch others and learn best practices. They can also help you decide if angel investing right for you. Try and find a group whose members have expertise in your areas of investment interest. ‘Going at it alone’ can further increase the financial risks associated with angel investing. Getting lots of opinions and insights from others is only going to increase your probability of success.

6) Develop a Strategy

Consider why you want to invest as an angel, think about what kinds of deals might make your day, and mull over how many investments you should make over time. For example, some potential angel investors have made money and want to leave a legacy; to be able to pass along their experience and knowledge (as well as make an ROI). They want to be involved in the important work of helping an entrepreneur grow a business — the highlights and the challenges. When creating your initial strategy, be sure and think about the kinds of companies (industry, stage, and location) you’d like to deal with, and how much of your net worth you’re willing to risk.

7) Don’t Hesitate to Ask Questions

Your first chance to gain some investment experience will likely be during a Q&A session, after entrepreneurs pitch their investments in angel group and pitch meetings. Remove any fear of asking a “stupid question,” because if you’re wondering something, other angels probably are too.

8) Write that Check

After you’ve grasped the basics about the process of angel investing, and found out what you need to know to invest in a good deal, it’s time to take that big leap: making your first investment. According to Hudson, first-time angel investors usually take this finally step around 6 or 7 months after they’ve decided to be an active early-stage investor.

This blog post was modified from a 2016 Forbes article, with the author’s permission.