For an investor, there’s no greater thrill than getting behind a promising new business early on and helping to make it a success story. Today, there are roughly 300,000 Americans who, as angel investors for startup organizations, attempt to do just that.
But breaking into the angel investing world, in and of itself, isn’t always easy. The Securities and Exchange Commission only allows “accredited investors” to participate, meaning you have to possess net assets (minus your primary home) of at least $1 million or have generated annual income of more than $200,000 for the past two years and be someone who "reasonably expects the same for the current year." If you’re married, the minimum income level must exceed $300,000.
Even if you make it over that regulatory hurdle, having any real success usually means joining a group of other “angels” who can share the research responsibilities and split up the total investment that a company needs.
The good news for early-stage investors is that the number of angel funding groups in the United States has exploded over the past couple of decades. According to the Angel Capital Association, a trade organization, there are now three times as many groups as there were in 1999.
It still helps to have personal connections, since 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 then ask you to join.
Most investor groups require membership fees – typically around $1,000 a year or more – and hold periodic meetings where they hear pitches from entrepreneurs in need of capital.
While attending monthly or quarterly meetings might sound like a lot of work, there are some important reasons why the team approach is so popular among startup investors. The majority of companies are looking for more money than any single investor is willing to put up – often upwards of $1 million. By dividing that ownership stake among several people, an individual may only have to kick in, say, $25,000 to $50,000 on any single deal.
Investors who band together can also split up the considerable due diligence that any major investment requires. Beyond being a major 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 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 is the ability 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.
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 enable you to contribute as little as $1,000 to a particular business, significantly lowering your exposure to risk.
Typically, a “lead investor” will put up a substantial amount of the total investment – often around 20% – and allow other syndicate members to kick in smaller amounts. To compensate the lead for his/her larger role in the deal, the other investors agree to pay the lead investor a “carry,” a percentage of the profit from their investment.
Some syndicates cover a fairly broad range of deals while others specialize in a specific industry, such as technology or healthcare. If you’re interested in connecting with other investors, the Angel Capital Association website is a good place to start. There, you’ll find a convenient directory of both online and traditional groups across the country.
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 have to meet face-to-face with other members to get your crack at early-stage investment opportunities.
For more insight, read about who can become an angel investor and the difference between private equity and venture capital.