Every now and then I get asked about angel investing. Questions such as “What is an angel investor?”, “How do I become an angel investor?” and “What do I need to become an angel investor?” are common and sensible questions.
What Is An Angel Investor?
Let’s start with the most obvious place to start, and easiest question to answer: What is an angel investor? Most simply, an angel investor is a person who invests in companies that are not listed on the stock exchange.
What Is The Difference Between An Angel Investor And A Venture Capitalist?
In a word: size. An angel investor is typically investing 4 to 6 figure sums of money, while a Venture Capitalist (VC) is typically investing 7+ figure sums. Angel investors are typically one person, while VCs are typically a group of people or a company. While angel investors may or may not have things to offer the company above money (mentorship, contacts, etc), VCs typically have more expertise and may even have teams dedicated to assist. Another difference is that an angel investor may not require a position on the board, while a VC almost certainly will want a position. VCs tend to want a larger share of the company and may be more ruthless / pushy to deal with (which can be a good or bad thing).
How Do I Become An Angel Investor?
This is probably the most common question after “What is an angel investor?”. Realistically though, the first question to ask should be “Should I become an angel investor?”.
This is an important question because for most people, angel investing won’t fit in their investing strategy and they won’t have the skills required to be an angel investor.
Angel investing is illiquid, meaning that often it’s extremely difficult to sell your shares. Typically the time-frame for return on your money is very long (5-10 years) and you have little to no control over your investment. For example, if the controlling shareholders decide they will never return money to shareholders because they want to keep growing the company, it’s difficult to do anything about that; hence angel investing doesn’t fit in most people’s investment portfolios. Typically you need a lot more money than you’re investing so that you have the option to partake in future capital raises (so you aren’t unfairly diluted) or sue the directors if things turn bad.
Angel investing also requires a lot of skills, experience and effort beyond other types of investing. Not only do you have to be able to calculate value in a company, understand basic accounting and have an eye for picking companies (researching industries, headwinds, tailwinds, etc.) as with normal investing, you also have to be knowledgeable in legal matters; dealing with people; identifying risks, conflicts and darn right traps; and have business experience way beyond what’s required of a normal investor. Here’s a quick checklist for angel investors that I put together, which might give a clue about some of the requirements to be an angel investor.
If you’re still interested in becoming an angel investor, you might also research the differences between a wholesale investor and a retail investor. It is not the requirements to be a wholesale investor that are of interest, rather the lack of protection and expectation of knowledge that are worth exploring, because this gives a clue about the sort of things one must consider as an angel investor.
If I haven’t scared you off and you’re confident that you have the skills and finances to be an angel investor, and such an endeavor is an appropriate form of investing for your strategy, then I probably don’t need to tell you how to be an angel investor; you probably just need pointed in the right direction to start hunting down investment opportunities. In which case, I refer you to Snowball Effect, which is where I bought my first angel investment. Snowball Effect have a selection of well put together offers for retail and wholesale investors that take out a lot of the effort and (massive amount of ) time in getting the opportunity correctly prepared (business cases, swot analysis, business plans, checking the strategy, use of finances, legals, valuations, etc.), though ultimately it’s important to remember that even if you’re only a retail investor, the responsibility still lies on you, not Snowball Effect. So you have to know what you’re doing.