How to Become an Angel Investor

Life as an Angel Investor

So you have already signed your first check and are wondering what comes next. In this chapter, we examine angel investing from a personal standpoint. We also look at those angels that have committed to a long-term commitment to angeling, breathing startup ideas, and investing in the future. Some may have decided to retire from day-to-day managerial positions. In contrast, others choose to invest themselves entirely into angel investing or even become general partners of a venture capital firm.

To start, let us explore the concept of being a full-time angel.

Is It Feasible To Earn a Living by Investing in Startups?

Investors that get straight into investing and set up their seed fund may be mistaken for venture capitalists rather than angel investors. They spend their time conducting meetings with prospective investments, coaching start-ups from the businesses they partially control, raising money from LPs, getting involved in due diligence, negotiating contracts, and so on.

As a solo angel, you will be hampered by the amount of time you have. Even if you are efficient at conducting due diligence, evaluating firms, meeting founders, and doing research take a toll on your energy and the number of businesses you can invest in and later improve.

An angel investor that is fully dedicated can invest in 10 to 20 companies per year. If on average, they are spending $25,000 per company, this would add up to them investing between $250,000 and $500,000 yearly. However, if they were working as a VC and took a 4% management fee, then their salary would only be around $10k-$20k annually. Considering the opportunity cost is much higher– an angel could earn 10x-20x more easily– this does not seem like nearly enough payment for their time & resources.

Many people who spend a lot of time working in angel investing either do it as a hobby or have another source of income. Suppose you are retired and have been successful in your career. In that case, you could eventually invest as an angel full-time, which has the potential to be profitable and also rewarding because you get to help startups grow.

How Much Profit Can You Make From Angel Investing?

The primary advantage of angel investing is that it offers significant benefits to society and on a personal level. The majority of people are still interested in learning how lucrative it is. Several studies have been conducted by Wharton University, the Angel Capital Association, and the Angel Resource Institute.

The findings conclude that one out of twenty companies needs to bring in 5x to 30x returns to earn a profit. Out of the startups an angel invests in; several will become what is known as “zombie startups.” This term refers to companies that exist without any exit strategy, for example, company sale, shares sale, or company wound up. The internal rate of return (IRR) for the average angel investor’s portfolio is around 22%. With an average old time investment span of 4.5 years.

The survey concluded that the more research you do on a company, the better your internal rate of return will be. They advise investing at least 20 hours into companies you are interested in. Additionally, remaining in contact with the company post-investment (at minimum, once every other month) also increases IRR.

At Angel Investor School, we have a handy spreadsheet that can help you calculate your potential returns on angel investments and the importance of diversification.

The Everyday Life of an Angel

Day in a Life of an Angel

Many active angel investors have told us what a typical day or week looks like for them. One common thread is that they use email extensively (and increasingly Whatsapp and other communication tools). Some have chosen AI-enabled technology for their emails, such as Superhuman, as they can receive over 1000 non-newsletter emails weekly.

Angels who are always on the go typically have excellent time management skills and a full schedule.

Take on the perspective of a typical angel. They have had many jobs in their life. They are board members at a few firms they have started, parents, and active sportspeople.

They schedule their day so that angel investing takes place in the early morning and late at night when children are asleep.

They enjoy attending meetings and giving talks at their place of business. They frequently attend events, as well as the media, to speak in private dinners with VCs. They take the time to prepare their speeches and enjoy meeting new people over dinner, which increases their deal flow.

They can have a personal assistant that helps them go through all the pitch decks they receive and set meetings with the select few they want to learn more about.

They put work aside in the afternoon and on weekends to spend time with family, as they enjoy watching their children grow up and playing with them.

They are always available for their portfolio founders and share their phone numbers with them so the founder knows they can depend on them when needed.

How Frequently Do Angels Communicate With the Founders?

A reasonable question to ask yourself after investing in a company is how frequently you should stay in touch with them and what type of expectations you ought to have.

While working on a startup, there are several questions that entrepreneurs ask themselves. When a founder is anticipating too much contact, it is probably not a good indication since this might indicate they are somewhat reticent about where to take the ship. It may signal that they can not run the firm as intended because of insufficient contact (or lack thereof) or require significant assistance (with contacts, how to scale, or the company model itself).

Having too little contact with others is also adverse, as the goal should be to have people surrounding you that can assist. It all depends on the circumstances under which you join and the support network that the startup has established.

This is called passive angel investing, when you join an investment as a secondary angel or through a syndicate. If you are lucky, the startup will send you regular reports on their progress. For the most part, you can just sit back and hope for the best. Your biggest contribution might be following up with additional investments when needed or attracting other angels or VCs to invest more money when that becomes necessary (which it inevitably will).

However, if you are a lead angel investor or a strategic investor, you will spend more time in the trenches than most. As an angel, you may help the firm become a mentor, receive compensation as an advisor, and even sit on the board of directors. Furthermore, startup founders often rely on angel investors for their network of connections that can help them reach new heights or allow them to obtain government approval.

To be a successful angel investor, you must first know your strengths and weaknesses. You also need to set realistic expectations for yourself so that you can attract deals that are feasible for you.

Discussing Expectations

Expectations To Set

It is critical to set out expectations as an angel investor. Before you sign the term sheet and send the cash, consider what you are willing to contribute to the firm in terms of your commitment. What do you want to achieve from this investment? You may take it easy if you are only looking for a return on your investment. You might maintain a closer relationship with the company if you seek training in a subject or area.

It is essential to be transparent with the founders, not just about what you are giving but also why you are doing it, so they would not be startled when you start asking for extensive reports. When we adopt a policy of radical honesty, things appear to operate better.

Once you have established a connection, take the time to assess whether your expectations are being met and if you are meeting the needs of the other participants. This is effective at any time, whether things are going well or not so well.

Roles of Angel Investors

Roles of Angel Investors

Investing in a Company as a Strategic Investor

Being an angel investor is more than just giving companies money; it is about becoming an asset to their growth and development. If you want to become a desirable angel investor, start by identifying the qualities and assets you can offer startups. For example, Bill Gates and Elon Musk are highly sought-after because of what they bring to the table beyond funding.

You can become a dominating force in your desired field with enough dedication. For example, Fabrice Grinda is notoriously known to founders building platforms and marketplaces as an excellent early-stage investor. Contrastingly, Dan Martell has built himself up to be one of the best investors and coaches for SaaS companies. Having either of these men’s names associated with your company gives a great first impression to later VCs.

The more firms you finance and assist, the better your expertise will be and the more prominent you will be in the startup sector.

An angel offering a specific, relevant strength to a company can be more valuable than money. This might even be worth giving extra equity/options to the person. Strengths come from process knowledge, industry knowledge, and network knowledge.

So, in a nutshell, when you meet with entrepreneurs, be clear on what you will contribute and how often. Also, keep in mind that giving them money does not necessarily mean you will be able to demand anything from the owners. Capital is plentiful, so if startups are searching for funds and would not consider your abilities or network, writing that cheque might be a warning flag.

Taking the Role of a Mentor

Angel investors have become more involved as mentors to startups. They may serve as a helpful sounding board for entrepreneurs who want to discuss ideas and learn in a secure environment without coming across as intimidating or amusing in front of co-founders or the company board if they do not have the most vested interest in the firm. This is especially true when the angel has prior entrepreneurial experience and has fought similar battles to those the startup is currently facing. This might pertain to business issues but can also relate to work-life balance concerns.

Angels who are passionate about startups can be extremely helpful to founders, and they often take great pleasure in helping them out. This may be one of the most significant rewards for angels. For mentors, feeling like they are contributing to a company’s growth is usually enough reward in exchange for their efforts. It makes them feel valued, especially those who have already retired from day-to-day work.

For a firm, being connected with mentorship conveys trustworthiness. Having credible and successful people linked to the firm can aid in its growth.

A mentor may be a business leader, an expert in the field, or someone who has previously worked with your organization. Multiple mentors are permissible because each one might fulfill a different function. Some of them will specialize in the industry and provide professional insight into it, while others will focus on growth hacking and share their scaling strategies. Others will focus more on individuals, assisting startup founders in relieving stress caused by their anxieties and concerns.

Keep your early mentorship interactions light and informal to allow both parties to feel each other out. If things are going well, you can start thinking about making the arrangement more formal. This might include documenting expectations and commitments and could even involve financial compensation for the mentor’s time.

Taking the Role of a Coach

Although many people see coaching and mentoring as the same, they are two distinct approaches to learning. Mentoring is more focused on long-term growth and usually done informally with someone with more experience. Coaching is shorter-term and often utilized by people who want tangible results quickly; the coach need not be an expert in the skill being learned. Those who practice coaching use specific techniques like asking questions, following up regularly, and pushing people outside their comfort zone to make positive change happen.

Joining an Advisory Board

In an advisory board, a seasoned professional is asked for advice and direction; they will be mentioned in pitch decks and asked to carry out several activities, such as recruiting and business development. Their name will be used in pitch decks to indicate that important people trust this firm and give their time and valuable expertise. It also indicates that the founders persuaded some major players to join the startup’s development.

Being Part of the Board of Directors

As a company grows, it will need more guidance, so the board of directors will evolve. When there are only two employees, they can often communicate without difficulty, so there is no need for a board of directors. However, this becomes necessary later down the line, when the company is larger. If you invest as an angel with significant power or control, you may be offered a seat on the Board of Directors or require one–depending on how big the company is, what stage they are at in its business journey, etc. This is something that Venture Capitalists typically request access to (again, depending on various conditions), but boards can easily include angel investors, too, if all parties agree upon it.

If you join one board, however, the value you may add to the team is that you can bring a different viewpoint to the table; that you can question and fight back on their actions and ideas; that you can be proactive with new ideas on what a firm might do to address its issues; and that you may offer strategic thinking. Governance and oversight are two other areas in which value may be added, which is why directors are required by law to perform this function.

There are a few key things board members should avoid if they want to be productive and effective: coming to meetings unprepared, hogging the floor during the discussion, and behaving destructively toward the team or CEO.

One of the most crucial aspects of assisting is recruiting. This might take the form of suggesting excellent individuals who should join the firm and conducting interviews with prospective employees. Supporting fundraising is another significant assistance for businesses, particularly since CEOs are often time-constrained by this operation. Risk management is another critical responsibility for board members, and establishing effective controls and monitoring the company’s accounts are both essential. When it comes to fundraising, good governance and risk management will be critical since VCs and investors will be able to write checks to solid organizations with excellent oversight. Examining the CEOs of firms is especially crucial as the boat captain may require assistance in developing certain talents or even replacing him. Finally, because directors have a fiduciary duty toward shareholders, they should ensure that the firm’s exit plan is always up to date to maximize the company’s value.

Some of the Most Notable Angel Investors

Notable Angel Investors

Many well-known entrepreneurs have become angel investors or venture capitalists. Here are some of the most influential investing role models.

Ron Conway is a well-known Silicon Valley investor who put money into Paypal and Google in their early days. He led Angel Investors LP for some time and then founded SV Angels. Since the mid-’90s, he has been an active angel investor and is generally considered one of the most influential people in the technology industry. He has won awards such as being included on Vanity Fairs’ 100 most influential people in the Information Age in 2010, awarded Best Angel at the 2009 TechCrunch Crunchies Awards, and named on Forbes Magazine Midas list of top deal-makers in 2011. He is undoubtedly one of the most well-known names still around.

Dave McClure, the founder of Practical Venture Capital and 500 startups, is an investor and entrepreneur in Silicon Valley. He has been in the industry for over 25 years, and his experience as a founding partner at 500 Startups has given him $500M assets under management. Dave has backed hundreds of startups worldwide, including 15 unicorns and 5 IPOs. Sendgrid, Twilio, Lyft, Slideshare, Mint.com, and Lucid are among his investments. Forbes named him one of the top venture capital investors in the world in 2016 and 2017 (Forbes Midas List).

Marc Andreessen is an entrepreneur, investor, and coder who you should know about. He made Mosaic, the first web browser, which AOL later bought for $4.2 billion. He co-founded Loudcloud, sold to Hewlett-Packard as Opsware for $1.6 billion. Furthermore, Andreessen created a venture capital firm called Andreessen Horowitz, which has been ranked number one multiple times.

Naval Ravikant is an Indian-American entrepreneur and angel investor who is a big advocate of angel investing. He co-founded AngelList, as well as the venture capital firm Andreessen Horowitz. He has invested in over 200 early-stage firms, including Uber, FourSquare, Twitter, Wish.com, Poshmark, Postmates, Thumbtack, Notion, SnapLogic, OpenDNS, Yammer, and Clearview AI (with over 70 total exits), with over 10 Unicorn companies created. He is one of the most innovative investors out there. VentureHacks & AngelList are two incredibly valuable resources he developed for entrepreneurs and angel investors.

Finally, Mark Cuban is another name to consider in the community. Since he was a child, he has been an entrepreneur. Extremely bright, well-connected, and passionate, Mark began selling rubbish bags door to door after being extremely irritated by an employer who wanted him to clean rather than close a vital sale. MicroSolutions, a computer consulting firm founded by Mark in response to this demand for him to clean rather than close a significant transaction

In 1995, Mark and Todd Wagner created Broadcast.com, an audio streaming website that allowed people to listen to Hoosiers Basketball games from anywhere in the world. In just four years, their company was sold to Yahoo for a whopping 5.6 billion dollars! Today, Mark is chairman and CEO of AXS TV and an investor on Shark Tank with ABC. His ever-growing business portfolio remains extremely successful today.

The Fabrice Grinda Story: How to Become a Super Angel

A few angels, rather than working for an established venture firm, have decided to create their own. Super angel Fabrice Grinda is one of these people; he opened up FJ Labs with his partner and friend Jose Marin. Helping other founders by investing in their firms aligned well with Fabrice’s goals because it allowed him to continue being an entrepreneur while also dedicating time to listening to others.

Fabrice’s angel career began in 2010 when he made his first seven investments in just two years. He was fortunate to have six successful finishes on them, thanks to his previous experience. When his company OLX grew and expanded, Fabrice had the opportunity to invest more aggressively. He came up with a method for screening businesses within one hour. Fabrice usually rejects businesses across his desk; however, he comments significantly on what does not fit with his investment thesis and offers guidance.

After making 10-25 investments per year, he realized a lot of administrative work had to be done. He decided to get his assistant to sign all paperwork without carefully reading it. While this strategy worked well for him then, it is not recommended for any investor. A few years later, he partnered with Jose Marin, the co-founder of DeRemate.com, to co-invest in deals. It was a beneficial partnership since Jose took care of the meticulous details, such as paperwork and legal.

After exiting OLX, Fabrice continued investing in startups and seeking external funding. He found an investor in Telenor, an international telecommunications provider, who valued Fabrice’s foresight into the future of the economy and platforms. They secured $50 million in investment, and from that point forward, the company has continued to grow stronger. They currently employ more than 30 people divided into several task forces so that Fabrice and Jose can focus on meeting with founders and assessing them accordingly.

The Successful Story of Ullas Naik: From Angel to VC

The path of Fabrice is not the only one when it comes to turning into an institutional investor. It is worth looking at Ullas Naik, another Angel Investor School ambassador, and his story. He explains how some people choose to start with personal angel investing in learning the ropes before moving on to venture capital.

His first investment was as an angel in 1995; within three years, he made 12 investments. Six of them became billion-dollar businesses. He recognized that investing in startups was more enjoyable than stock trading on Wall Street, which became his first look at venture capital. In 1999, burned out with Wall Street and thinking about going full-time into venture capitalism, he decided it was the right moment to do so.

He noted that he could take more risks with angel investing since he would be evaluating companies that might not meet institutional investor standards. When moving into an institutional role, he realized that his investment thesis and market point of view should direct his investments.

Ullas felt comfortable investing in rapidly moving companies without conducting comprehensive research due to his experience as an angel investor. He designed Streamlined Ventures with the same amount of flexibility, so it would be similar to how an angel behaves. Consequently, he is the only general partner in the fund. 

From his perspective, being an institutional investor means putting in much more work. He explained that there are hours upon hours of research to ensure they’re fulfilling their fiduciary duties to limited partners while also trying to increase the chances those companies will succeed.

Eneko Knorr and Angel club.ES’ Story

Eneko Knorr, one of our distinguished ambassadors, has considerable expertise in creating a club. He is a Spanish serial entrepreneur and venture capitalist with 20 years of experience in IT startups. In 2018, he was named Business Angel of the Year by the Spanish Business Angel Networks Association and Best Investor by the New York summit in 2015, honorary professor at the University of Vasque Country University, and associate lecturer at IE Business School in Madrid.

He had many thriving investments and was constantly asked by other starting angels if they could invest in the same deals. So, he decided to create AngelClub.es–a newsletter that became very popular very quickly. People were drawn to it because it offered an opportunity to co-invest with him, mostly in regional deals. He charges a commission for managing the investment; otherwise, investing is free. Most of his focus lies in Spanish startups since that’s where his strengths are global.

Welcome to Bill Morrow’s Angel Den

Bill Morrow, another of our ambassadors, has established Angels Den, one of the world’s largest investor groups. It currently has an international presence in over ten nations. Before opening the cash to a wider investor community, Angels Den Funding ensures that start-ups are matched with a suitable lead investor who has sector knowledge and is willing to conduct due diligence and offer mentorship to help the firm develop. The lead investor generally possesses sector understanding and is ready to do research as part of his investment agreement.

Bill created Angels Den to curate deals, teach angels, and connect lead investors with startups. His light bulb moment came while watching TV shows like Dragons Den and Shark Tank. While observing the questions people were asking on these programs, he realized that the founders of businesses were not expressing themselves in a digestible way for television viewers. And so he decided to provide them with the tools necessary to change this. In 2007, he started a firm in an attempt to do something beneficial for the market. Many individuals were seeking to invest at that time, and many were dissatisfied with existing solutions. Years later, there are 22,000 investors from all around the world looking to invest through his club. Angels Den is proud of its ten years of equity investment experience, including arranging 50 events each year and a 92 percent success rate among funded deals still in operation.

How To Know When It Is Time To Give Up

Signs You No Longer Get What You Want as an Angel

Though angel investing is not a lifelong career, many people choose to run it for several years after they retire.

Ask yourself frequently whether you are receiving the desired results from your encounter. This may include financial gains, new possibilities for learning and development, exposure to new ideas and start-ups, networking, and influence.

In conclusion, the experience should be beneficial and not overly stressful, taking away from your work/life balance. To ensure this is happening, we recommend reviewing your strategy annually and setting some KPIs to gauge whether or not this occupation will have positive long-term effects.

Summing It Up

If you are still reading, congratulations! You must be interested in becoming an angel investor. By making investments, you will contribute value to the world and hopefully have a lot of fun too. And who knows – with your first investment, you could end up hitting that home run that creates a new unicorn company, changes people’s lives, and makes a killing in terms of returns.

If you are still on the fence, keep in mind that life is always unpredictable, and you may never know what you will get. They claim that change is the only thing constant in life, so embrace it. Those who do not take any chances would not go very far. Remember to surround yourself with successful and compelling individuals; chances are you will become as wealthy and happy as the average of those with whom you associate.

You may always join us at Angel Investor School if you want expert training on becoming and operating as a successful angel investor. We offer a variety of courses on angel investing. We look forward to welcoming you with open arms.

FAQs

An Angel Investor is a person who invests in a business at its early stages, providing capital in exchange for equity. They are often friends or family of the entrepreneur, but they can also be strangers.
The amount of money that Angel Investors typically invest can vary greatly. Some Angel Investors may only invest a few thousand dollars, while others may invest millions. It all depends on the individual Angel Investor and the business they are investing in.
An Angel Investor is typically someone who invests their own personal money into a business, whereas a venture capitalist is an institutional investor that invests money on behalf of their firm. Angel Investors tend to be more hands-on than venture capitalists, and they often have more personal relationships with the entrepreneurs they invest in.
Some of the risks associated with Angel Investing include the possibility of losing all of your investment, as well as the potential for dilution if the company raises additional funding from other investors. Angel Investing is also a time-consuming commitment, so there is an opportunity cost associated with it as well.
Some of the benefits of Angel Investing include the potential for high returns, as well as the opportunity to be involved in the early stages of a company and help shape its future. Angel Investing can also be a great way to network and build relationships with other successful entrepreneurs and investors.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.