If you have ever watched the hit reality TV series, Shark Tank, you will have seen an example of angel investing. While the TV series simply wants to entertain viewers, it is an example of entrepreneurs wowing wealthy individuals capable of investing large sums into their projects.
Angel investing is a great way for an entrepreneur to gain the funds needed to grow their business. Many entrepreneurs attempt to gain multiple investors to cull together funds. When it comes to angel investors, you simply need one high-net-worth person or sophisticated investor to financially back your company.
There is a caveat when working with an angel investor, however. You may have noticed this while watching the previously mentioned reality show Shark Tank. Angel investors invest in your startup company but take a certain percentage of ownership in it.
The financial backing comes in exchange for a piece of equity in your company. Typically, an angel investor may be a member of an entrepreneur’s family or a part of their circle of friends. However, angel investors can also be high-net-worth persons seeking a new investment idea – one that they believe will earn them large amounts of profits.
How to make money angel investing
You may be curious as to how an angel investor makes money. You may have a large sum of cash you want to invest, but rather than do it in stocks, bonds, property, or collectibles, you prefer to put it into a business.
Mega companies like Google, Microsoft, Apple, and Facebook had to start somewhere, right? So, what if you go in on the ground floor of a new startup as an angel investor? You could make millions if the brand takes off. Not only could you make a great profit, but the excitement of watching the brand grow from a seed to a full-blown company is special.
Angel investors are not around every corner. They are a rare breed of business men and women who financially back startups. Their financial backing comes after an initial period in which the startup’s owner(s) have put in their own capital. The good news is that according to research, angel investing is on the rise as more people around the world seek to help startups grow while making a great profit for themselves.
Like any investment, there isn’t a sure thing and investing in a startup is risky. A startup business is likely to fail without turning a profit leading you to lose the money you put into it. Many high-net-worth individuals, think of people like Mark Cuban, are often excited by investing in startups. This is what really drives them to be angel investors rather than making money.
How do angel investors invest in startups?
In truth, any amount of money exchanged for a piece of equity in a business can be seen as angel investing. It really depends on how much the startup needs or wants to develop further. It also depends on just how much you actually want to put into the brand.
On average, the typical angel investment ranges from $100,000 to around $1.5 million. Right now, it must be noted that if you are not savvy about finances and business, then you shouldn’t attempt to invest in a startup. One poor decision and you could lose everything you put into the company. There is an alternative way to invest in startups today, although perhaps not as lucrative, and that is through crowdfunding.
Angel investors differ from venture capitalists. The former are high-net-worth individuals that invest their own funds into a startup at an early stage of development. A venture capitalist invests in startup companies after raising money from third-party sources. The money is invested through a fund. As an angel investor, you may or may not be hands-on with the startup after purchasing a piece of equity in the company.
What are the steps to becoming an angel investor?
The first stage of becoming an angel investor is to find an entrepreneur with an idea for a startup company. Perhaps the startup has already been formed and is in its early stages of development. Regardless, you want to locate a company that offers a product that fills a gap in the marketplace. Once you have located an entrepreneur, it is vital that you do your due diligence. You don’t want to work with someone who has seen their previous business fail. They need to be a semi-successful person already.
Once you have become known as an angel investor, you are likely to have a number of entrepreneurs who contact you and present their startup ideas. Since many startups fail right out of the gate, it is vital that you are selective with who you work with. By selecting the brightest and most passionate entrepreneurs, you improve your chances of success. However, you should know that passion doesn’t always lead to successful startups.
As an angel investor, you should demand commitment from the entrepreneur. They should do everything possible to promote and advance their company. You need to be able to trust your entrepreneur and ensure they are not just taking you for a ride.
What is the goal of angel investing?
Some of the best new startups are companies that expand on previous ideas rather than disrupting the marketplace. You should become active in the startups you work with. You are part owner and risking your own money on the success of others. An angel investor needs to promote the startup to reduce investment risks and promote profit making capabilities.
The endgame of angel investing is to make money over a five-year period. Some expert angel investors want to see profits after just three years. Unfortunately, many startups fail well before the three-to-five-year period. You want to earn a minimum of three-times to a maximum of 30-times your initial investment. Selling the startup to a large company or an IPO can see you make profits from the original investment you made.
Angel investing is a great way to gain equity in a startup. If you play your cards right, you can grow a business, sell it and earn a great profit as an investor.