For an investor, there’s no greater thrill than getting behind a promising new business early on and helping to make it a success. Today, there are roughly 300,000 Americans who, as angel investors for startups, attempt to do just that.
But breaking into the world of angel investing isn’t always easy. The Securities and Exchange Commission (SEC) allows only accredited investors to participate—meaning you need to have net assets (minus your primary home) of at least $1 million or have generated an annual income of more than $200,000 for the past two years and "reasonably expect the same for the current year." If you’re married, your combined minimum income must exceed $300,000.
The amount of active angel investors in the United States continues to grow. The Center for Venture Research estimates that there were more than 300,000 individual angel investors in the United States in 2019, which provide funding for over 60,000 companies per year. This increase accompanies a general rise in the entrepreneurial and startup culture in the U.S. and around the world. Indeed, many of the most valuable firms today were founded within the past two decades, such as Apple, Alphabet, Amazon, Tesla, Netflix, Stripe, and Nvidia.
But because we all cannot be the savvy venture capitalist spotting the next Jeff Bezos, it's generally wise to team up with an investor group. Even if you make it over the SEC's regulatory hurdle, having any real success usually means joining a group of other “angels” who can share the due diligence responsibilities as well as the initial seed capital.
- Angel investor groups are comprised of high net worth individuals who provide financial backing for small startups or entrepreneurs.
- The SEC allows only accredited investors to participate in angel investor groups.
- It makes sense to join a group instead of going it alone as an angel investor because you can share in due-diligence efforts as well as seed money.
- Angel investor groups are not for all investors because typically they invest in high-risk high-reward deals.
Traditional Angel Investor Groups
The good news for early-stage investors is that the number of angel funding groups in the U.S. has exploded over the past couple of decades. According to the Angel Capital Association (ACA), there are now three times as many groups as there were in 1999. In 2019, ACA membership consisted of 275 angel groups, with an estimated 400 total groups in the U.S.
Still, it helps to have personal connections, as most of these groups allow membership by invitation only. That doesn’t mean you’re necessarily out of luck if you don’t have an “in” with any of the current members, however. Some will allow newer angel investors to participate in a couple of meetings as a guest. Once they get a sense of your commitment level and what you bring to the table, they may ask you to join.
Most investor groups require membership fees—typically of around $1,000 or more per year—and hold periodic meetings where they hear pitches from entrepreneurs in need of capital.
Advantages of Angel Groups
Although attending monthly or quarterly meetings might sound like a lot of work, there are some important reasons why the team approach is popular among angel investors. Most young companies are seeking more cash than any single investor is willing to put up—often upward of $1 million. By dividing that ownership stake among several investors, an individual may only need to kick in say $25,000 to $50,000 on a single deal.
Investors who band together can also split the considerable due diligence work that any major investment requires. Beyond being a huge time-saver, a collaborative operation allows the funders to draw on each other’s experience and expertise. The decision to invest in a business is still up to the individual, but in this way, prospective investors get input from others in the group before they decide whether to get involved.
Perhaps the biggest advantage of joining a group, however, is being able to learn about more deals. Angel investing is by its nature a high-risk high-reward proposition. As such, most experts suggest having a portfolio of at least 10 companies in order to protect your capital. It certainly helps to have a steady flow of leads coming in—something that’s hard to achieve if you’re going solo with regard to angel investing.
Online Investing Syndicates
If you like the idea of joining up with other investors but don’t want the commitment of a traditional investing group, you do have an alternative. Online syndicates such as AngelList allow high-net-worth individuals to work together on deals, often with no annual fees and no meetings.
Online groups are also attractive to those who aren’t ready to put up large sums of cash. Some syndicates let you contribute as little as $1,000 to a particular business venture, significantly lowering your exposure to risk.
Typically, a lead investor will put up a substantial amount of the total investment— often around 20%—and let other syndicate members kick in smaller amounts. To compensate the lead investor for their larger role in the deal, the other investors agree to pay the lead a “carry”—a percentage of the profit from their investment.
Some syndicates cover a fairly broad range of deals and others specialize in a specific industry, such as technology or healthcare. If you’re interested in connecting with other investors, the ACA website is a good place to start. There, you’ll find a convenient directory of online and traditional groups across the U.S.
The Bottom Line
If you’re new to angel investing, it often helps to join a group that can partner up on deals and spread out the due diligence work. And with online syndicates, you don’t necessarily need to meet face-to-face with other members to get your crack at early-stage investment opportunities.