- By SeedInvest
- August 3, 2022
- 8 minute read
Do you want to start investing in startups but don’t know where to begin? The first step is to understand how angel investing works, how much funding startups are seeking at various stages of growth, and how to find opportunities that fit your investment thesis.
Here’s what you need to know.
Angel investing involves putting your own money into a startup in exchange for equity or future equity in the business. Angel investors come from a wide range of backgrounds and often invest during a company’s early stages. They can act on their own, as part of an angel network, or through third-party entities such as syndicates and equity crowdfunding platforms.
Common Angel Investing Terms:
- Startup: A private company in its early stages of development
- Founder: The creator or owner of a startup
- High-net-worth individual: A person with liquid financial assets over $1 million
- Accredited investor: A person who meets certain income (above $200k/year) or net worth requirements ($1M in assets excluding primary residence) set forth by the U.S. Securities and Exchange Commission (SEC) which allow them to make investments not available to the general public
- Non-accredited investor: An investor who does not meet the requirements for accreditation as defined by the SEC
- Equity crowdfunding: Funding a startup or early-stage company through small amounts of money from a large number of non-accredited and accredited investors, typically via an online platform
Tip: Want to know more startup terms? Visit our glossary.
Historically, angel investors have been high-net-worth individuals providing funds directly from their own wealth rather than from a venture fund or institution. For most of its history, angel investing was done largely through direct relationships between private investors and startups. Non-accredited investors were unable to participate in these opportunities.
Over time, however, angel investing has evolved to include third-parties like equity crowdfunding platforms. This has been an exciting development for both founders and potential supporters, opening up opportunities to many would-be investors who have capital to deploy but don’t qualify as accredited.
It’s a win-win situation in which startups have gained access to a greater pool of investors, and everyday investors now have access to potentially lucrative startup investing opportunities that were previously reserved only for the wealthy.
Angel Investing vs. Venture Capital:
The main difference between an angel investor and a venture capitalist is that angel investors use their own money to fund a startup. Venture capital firms are institutions that invest someone else’s money, typically Limited Partners (LPs), which generally include institutional investors from pension funds, college endowments, trusts, family offices, etc.
Angel investors make their own decisions about where and how much to invest, while venture capitalists make decisions as a collective and often have stricter criteria for capital allocations.
Another notable difference between angel investors and venture capitalists is the timing of their investments. Typically, angel investors provide funds to very early-stage companies, often even before those companies are generating revenue. Venture capital firms usually invest a bit later on during a company’s Seed, Series A, Series B, or Series C round, though some VCs do participate in early-stage investing.
Given the sky-high percentage of startups that fail (90%, according to Forbes), Angel investing is inherently risky. But if you have the stomach for risk and are seeking opportunities with the potential to outperform public markets, it makes sense to investigate how to become an angel investor.
Here are some common questions people ask when they’re looking into this opportunity:
What are the requirements to become an angel investor?
Angel investors fall into two main categories: accredited investors and non-accredited investors.
Accredited investors must meet at least one of the following criteria:
Individual income exceeding $200k for each of the past two years with a reasonable expectation that the $200k threshold will be reached in the current year
Joint income with spouse exceeding $300k for each of the past two years with a reasonable expectation that the $300k threshold will be reached in the current year
Personal net worth (excluding the value of a primary residence) exceeding $1M
Hold in good standing a Series 7, 65 or 82 license
Due to changes in securities law, however, non-accredited investors (the vast majority of Americans) are now allowed to legally invest alongside accredited investors under certain guidelines. For example, both accredited and non-accredited investors can invest in private businesses through equity crowdfunding platforms like SeedInvest.
Can anyone be an angel investor?
Since the passage of the 2012 JOBS Act, startup investing is no longer limited to accredited investors. Everybody now has the opportunity to become an angel investor through avenues such as equity crowdfunding platforms.
That said, there are some important factors to consider before investing in a startup. After all, such opportunities were limited to accredited investors for so long specifically because backing early-stage companies carries substantial risks.
The SEC put many of these restrictions in place to ensure that investors fully understood the considerations involved in investing in startups. Restrictions on angel investing have eased with recent changes in the law, but the illiquid nature of startup equity has not. Therefore it’s essential that angel investors understand the potential financial implications involved in investing and err on the side of caution.
To better manage risk, many individuals only dedicate a small portion of their portfolio to startup investments and diversify across multiple startups. Angel investors should also be comfortable with having their money tied up for a minimum of 5-7 years. Businesses need time to become profitable, and it might be a while before even the strongest startup is prepared to go public or secure an acquisition.
Is there a minimum amount of money required to invest?
There is no standard minimum, and angel investors may invest as little as $1,000 or up to hundreds of thousands of dollars, though some founders may set their own minimums.
Forbes reports that, on average, the typical size of an angel investment is between $150k and $2M, but that figure can be considerably lower. For example, minimum investments on SeedInvest are determined by the startup in which you are investing, with many accepting investments of as little as $1,000. This low barrier to entry allows more investors to participate and may help startups raise the capital they need more quickly.
How do I choose startups to invest in?
Before investing your hard-earned money, it’s absolutely essential to do your homework. In finance parlance, this homework is known as due diligence, a process that involves conducting research into an investment opportunity to evaluate its potential. Due diligence allows investors to make more educated investment decisions and mitigate risk, while also unearthing other valuable clues about a company’s prospects for success.
A comprehensive, self-driven due diligence process might look at factors such as:
- What market the company will enter
- How does the company fit and compete in that market
- The backgrounds of the firm’s founders
- The short-term and long-term goals of the business
- Whether the startup in question will abide by the terms of the investment round
- The potential that may or may not exist for your investment to be profitable
Since the vast majority of startups fail, investors must thoroughly and objectively research any potential startup investment to ensure they fully understand the risks and benefits and weigh the two against each other.
Today there’s a vast assortment of angel investing opportunities out there. If you’re interested in getting your feet wet in the world of angel investing, SeedInvest is a great place to start.
As an equity crowdfunding platform, we offer angel investors a selection of rigorously scrutinized startup investing opportunities. Our vetting process is stringent; less than 2% of the startups that apply end up listed on our platform (though vetting does not guarantee success).
SeedInvest is intuitive and easy to use, and we offer resources to help you sharpen your knowledge and make more informed investment decisions.
We also allow lower minimum investments than many other investing platforms, so you can put your money into a larger array of startups to diversify your portfolio. View our current offerings and start your angel investment journey.
- This presentation should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy. Past performance is no guarantee of future results, and there can be no assurance that an investment strategy will be successful or that the historical performance of an investment, portfolio or asset class will have a direct correlation with its future performance.
- SeedInvest's due diligence process is no guarantee of success or future results. All investors should carefully review each investment opportunity and cancel their subscription within the allotted time-frame if they do not feel comfortable making any specific investment based on their own due diligence. Learn more about due diligence on the SeedInvest Blog and our vetting process in our FAQs.
- All securities-related activity is conducted by SI Securities, LLC dba SeedInvest, an affiliate of Circle Internet Financial, and a registered broker-dealer, and member FINRA/SIPC.