How to Become an “Angel Investor”Anchin Private Client CenterMarch 31, 2021
Many people find investing in a new venture to be exciting. The ability to provide funding to a start-up and to also be a part of shaping the company’s future, coupled with the potential for large returns, has a compelling allure. Previously, only accredited investors were eligible to become angel investors. Under Title III of the JOBS Act, non-accredited investors or individuals can now participate in angel investing through various crowdfunding platforms and groups. An angel investor should plan to gain a good understanding of the entrepreneur’s vision before making such a high-risk decision.
If you are not currently investing in start-ups but are interested in providing funding, there are a few ways you can get started.
The first round of funding for new ventures is commonly referred to as the “friends and family” round. Your personal network is a great place to start. Reach out to your contacts, especially anyone who has had experience as an angel investor and see if there are any opportunities that seem promising.
Beyond friends and family, there are Angel groups which invest in start-ups. An Angel group can be a group of friends that create an entity to invest together or it can be through an established organization. One of the most notable organizations is AngelList. AngelList allows you to review potential deals and select what appeals to you. By investing alongside experienced dealmakers, you may be more likely to make better investment decisions. You also can gain exposure to a broad range of start-ups through the AngelList Access Fund. In all cases, be sure to perform the required due diligence to properly evaluate the investment and dealmakers.
When starting to invest, it helps to select ventures where you can provide unique insights about the product and market. For example, if you have a background in technology, you can provide more guidance to a tech start-up than you would to non-technology alternatives. By choosing companies that align with your background and interests, you can better participate in the start-up’s growth. With that in mind, it is also important to diversify your investments. If you already have large amounts of exposure to a specific industry, you may want to consider branching out to limit your risk.
Of course, in most cases, you will want to make sure you can recognize a good return for your investment. The world of angel investing is high-risk and typically illiquid. Losing 100% of your investment is a real possibility. If you’re in the position to make several investments, only one or two may be successful, and the investments may require additional follow-on investments years down the road. With these risks in mind, you and your financial advisors can decide how much of an allocation toward angel investing is right for you and your portfolio.
To discuss some ways that these types of investments may impact your overall financial picture, contact David Horton and Marina Shah, members of Anchin’s Financial Services Practice, or your Anchin Relationship Partner.