Angel investing refers to when an affluent individual provides capital to a startup for equity and potentially profit. It is a common way for startups to raise funds in their early stages. However, angel investing can be risky if you don’t know what you’re doing. For beginners looking to get into angel investing, there are some basics to learn first. This includes understanding how angel investing works, figuring out how much to invest, finding the right opportunities, evaluating startups, negotiating deals, and managing your portfolio. With the right mindset and sufficient preparation, even novice investors can succeed at angel investing.
Understand how angel investing works before getting started
The first step for beginners is to learn exactly how angel investing works. Angel investors provide capital to early-stage startups in exchange for equity or convertible debt. The angel invests their money into the startup, and if the startup succeeds, the angel can earn a profitable return. However, if the startup fails, the angel risks losing most or all of their investment. Angels invest smaller amounts than venture capitalists, usually between $10,000 to $100,000 initially. The high-risk, high-reward nature and hands-on approach separate angel investing from traditional investments like stocks and bonds. Beginners should know that angel investing requires detailed due diligence, ongoing involvement with portfolio companies, and a diversified portfolio to offset inevitable losses.
Determine an appropriate amount to invest based on your finances
Beginner angels need to carefully consider how much money they can afford to invest. As a high-risk endeavor, angel investing works best when it is a small portion (10% or less) of your overall net worth. Only invest money you could afford to completely lose. Typical angel investment sizes range from $10,000 to $100,000. New angels may want to start on the smaller side as they gain experience. Remember that you need to invest in multiple companies to diversify your portfolio, not just one startup. So your first angel investments may only be $10,000 to $25,000 until you build up your portfolio.
Find the right angel investing opportunities that fit your criteria
To succeed at angel investing, beginners need to find the best opportunities. Look for startups in industries you know and can add value to. Leverage angel groups and online fundraising platforms to access deals. Avoid investing in family and friends – remain objective. Focus your search criteria on factors like the strength of the team, size of the potential market, early traction, and your ability to add value. Be selective – you won’t invest in most startups you see. Allow time to build your deal pipeline and wait for the right fit.
Conduct detailed due diligence before investing in any startup
Before investing, novice angels must perform detailed due diligence on each startup. Research the market, competitors, business model, financials, team, product, legal structure, and more. Use tools like data rooms and management interviews. Validate key assumptions in the business plan. Identify the key risks and determine if they are acceptable. Bring in help from experienced mentors, lawyers, and accountants. Spend at least 50-100 hours on each deal. Build a checklist for your diligence process. Only invest once you fully understand and believe in the opportunity.
Negotiate fair deals with achievable milestones and terms
Beginner angels should negotiate strong investment terms to protect their capital. Work with a lawyer to review the investment documents. Clearly define the milestones, exit strategy, and return metrics. Look for pro-rata rights, anti-dilution provisions, voting rights, and board seats. Make sure the valuation and deal structure are fair. Set clear vesting schedules for the founders. Outline follow-on funding obligations. Don’t be afraid to walk away from suboptimal deals that have too much risk or dilution.
Angel investing can be highly rewarding but also carries high risks. Beginners can succeed if they thoroughly understand how it works, invest wisely, find the right opportunities, perform detailed diligence, and negotiate fair deals. With the proper knowledge and preparation, novice investors can begin putting their capital to work backing promising startups.