Becoming an Angel Investor — VC for Dummies (edition 3)
A sky-high percent of Startups fail. Many many reasons for that. Reasons could be bad management / low marketing ability / not enough funds / being in the wrong market / bad partnerships etc.
Well, in my last write up, i covered some common investing terms, Angel investing vs VC and my first publication saw some good traction too wherein i covered, the basics of VC, the stages of VC & touched upon how do VC’s make money.
Today i talk about the risks associated with VC, requirements to enter into VC, min investments, some questions to seek from founders when you review startups & getting started.
Angel investing is inherently risky. But if you have the stomach for risk and are seeking opportunities with the potential to outperform public markets, it makes sense to investigate how to become an angel investor.
Here are some common questions people ask when they’re looking into this opportunity:
What are the requirements to become an angel investor?
Angel investors fall into two main categories: Accredited and non-accredited investors.
Accredited investors must meet at least one of the following criteria:
- Individual income exceeding $200k for each of the past two years with a reasonable expectation that the $200k threshold will be reached in the current year
- Joint income with spouse exceeding $300k for each of the past two years with a reasonable expectation that the $300k threshold will be reached in the current year
- Personal net worth (excluding the value of a primary residence) exceeding $1M
Satisfying the above criteria was purely fixated for the lucky few who could meet these conditions either through having had a huge payout which is now part of their savings or any ancestral money or even through being paid that amount of money as salaries.
Due to changes in securities law, however, non-accredited investors (the vast majority ) are now allowed to legally invest alongside accredited investors under certain guidelines. For example, both accredited and non-accredited investors can invest in private businesses through equity crowdfunding platforms (many such platforms exist today).
Can anyone be an angel investor?
Startup investing is no longer limited to accredited investors. Everybody now has the opportunity to become an angel investor through avenues such as equity crowdfunding platforms.
That said, there are some important factors to consider before investing in a startup, because backing early-stage companies carries substantial risks.
Restrictions on angel investing have eased with recent changes in the law, but the illiquid nature of startup equity has not. Therefore it’s essential that you understand the potential financial implications involved in investing.
To better manage risk, many individuals may only dedicate a small portion of their portfolio to startup investments and diversify across multiple startups or other streams of generating an income.
You should also be comfortable with having their money tied up for a minimum of 5–7 or even 10 years. Businesses need time to become profitable, and it might be a while before even the strongest startup is prepared to go public or secure an acquisition.
Is there a minimum amount of money required to invest?
There is no standard minimum, and angel investors may invest as little as $150 / $200 / $1000 or up to hundreds of thousands of dollars, though some founders/ investing platforms may set their own minimums.
Forbes reports that, on average, the typical size of an angel investment is between $150k and $2M, but that figure can be considerably lower as little as $1,000 if investments are made through crowd funding platforms. This low barrier to entry allows more investors to participate and may help startups raise the capital they need more quickly.
How to choose startups to invest in?
Before investing , it’s absolutely essential to do your homework. In finance parlance, this homework is known as due diligence, a process that involves conducting research into an investment opportunity to evaluate its potential.
Due diligence allows investors to make more educated investment decisions and mitigate risk, while also unearthing other valuable clues about a company’s prospects for success.
Here is what i have learnt to review and seek while evaluating pitch decks.
Type of markets (TAM or Total Addressable Market)
How does the company fit and compete in that market
The backgrounds of the CEO/ founders and their past stability
The short-term and long-term goals of the business
Revenues so far & Potential of earning in the future
How has competition fared in the market
How much capital is being raised & what is the usage of that money?
Monthly burn rate?
Detailed financial projections for the next two years?
What are the key assumptions underlying the projections?
What key cost components are there for the product or service?
Hiring / team dynamics
What are the likely gross margins?
Cost of a customer acquisition?
Projected lifetime value of a customer?
What advertising is needed and costs aligned?
How do you plan to scale the team in the next 12 months?
Angel Investing Opportunities: Get started?
Today there’s a vast assortment of angel investing opportunities out there. If you’re interested in getting your feet wet in the world of angel investing, Crowdfunded platforms are a good place to start.
Crowdfunding platforms offer angel investors a selection of scrutinised startup investing opportunities.
Here are some examples of Crowdfunding platforms (please do your own due diligence prior to signing up and investing)
What do angel investors like to initially see from an entrepreneur?
- A clearly articulated elevator pitch for the business.
- An executive summary or pitch deck.
- A prototype or working model of the proposed product or service (or at least renditions).
- Early adopters or customers.
Well, am sure with this, you have some ammunition to review and i would now expect & hope that you will look into options of these crowdfunding sites that i have shared.
While i further start elaborating on more due diligence in my upcoming articles, am happy to get feedback and your love (claps) to continue sharing my learnings.
A small attempt towards sharing the knowledge of my learnings.
Stay tuned for more small byte sized learning. Will keep adding more.
Do give me a clap and share ahead (i love being motivated).