Starting Out? Are You Already Angel Investing? Here are some General Facts about Angel Investing:
- An angel investor is a person who invests money into someone else’s business, in order to get an attractive return.
- Angel Investors usually invest in companies after the Founder has gone through seed money from “Friends & Family”.
- Many Angels want to be actively involved in the business, and usually seek to invest in businesses that are familiar to their background.
- Angels understand that they can lose 100% of their investment.
- Angels’ ROI varies greatly, from losing everything to 50x multiples, which is why it’s important that you understand your own motivations for investing. The risks involve early stage investing as a segment, where the venture team may have to overcome all three general types of risk: technology risk (does it work?), market risk (is the market there? Now?), and management risk (is the team experienced, full, and competent?)
- Additional risks of early stage investing is that if a company has not grown sufficiently or met its milestones, a common occurrence is that future investors will demand difficult terms and give lower valuations than expected. The earliest stage can involve the greatest returns, but also the Angel should be aware of the “cram-down”, because most companies will require future rounds of growth capital.
- Angels should be “accredited”. The SEC’s definition of an Accredited Angel Investor is someone who earns over $200,000 a year for three years or for two years if they have a reasonable expectation of earning more than $200,000 in the current year, or someone who has net worth in excess of $1 million.