What It Takes to Become an Angel Investor

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Last Updated: November 22, 2010

First Posted: October 1, 2009 by Matthew Brodsky

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angel 300x199 What It Takes to Become an Angel Investor Angel investing can be a very exciting engagement, but many who consider taking the plunge into such high risk investing don’t fully understand what they are getting into and miss out of the full benefit of the experience. Not only can this lack of understanding limit the potential pay out if the company succeeds, it also prevents the proper integration of knowledge and expertise that should emerge from such arrangements.

Risky Business

“The metrics of angel investing are sobering – it is not a game for the faint of heart,” according to David S. Rose, managing principal of the Rose Tech Ventures Team and a member of the New York Angels, in the NuWire Investor. “Of every 10 deals you make, 5 crash, 2 return even money, and 2 give you 2 to 3 times your money.” [1]

This risk is not news to angel groups, a main reason why these strategic investors pool their resources instead of venturing alone. By spreading the risk, angels can more widely diversify their investments in hopes of increasing their chance of a strong return. Such groups also allow for a pooling of knowledge and experience to make more informed decisions on investments.

Types of Angels

While it is true that angels invest to make money, it is not the only benefit these individuals are after when they make an investing decision. Many of these investors are seeking to expand their own knowledge, to get better at identifying good opportunities. There are also a number of angels out there who invest in startups because they love the rush of a new adventure. [1]

When it comes to angel groups, not all angels join a group simply to increase their chances of higher returns. When an angel joins an experienced angel group, they can take advantage of research capabilities and industry connections, as well as the group’s expertise in selecting the best of breed deals. Aside from the benefit of potentially higher returns and spreading the risk, angels learn invaluable tools.

Things You Should Consider Before Wearing the Halo

There is a wealth of advice available in the market to show you the steps to take to begin investing. With so much information, how do you determine the right path? The first and most important step is to determine just how much risk you can handle. If you are risk adverse, perhaps angel investing is not for you. On the other hand, if you like adventure and get excited by new ideas, you can consider moving to the next phase:

First, do you have enough net worth to make the desired investment? The money you use to invest should be no more than 10% of your net worth to ensure viability.
Second, you should have relevant experience in the field you are considering for investment. A lack of experience can lead to bad decisions.
Third, you should hire a lawyer experienced in angel investing. Their expertise and due diligence is invaluable.
Fourth, you should understand the business strategy and exit for the company. If you don’t understand where you are going or how to receive your potential profits, you’re in over your heads.

Ask the Important Questions

NuWire Investor offers a list of questions potential angels like you should be able to answer before making a decision to move forward with any type of angel investing. [1] You should ask yourself the following:

Do I have enough capital?
Can I devote time to this company?
Can I leave my money invested for a long time?
Can I afford to lose the entire investment?

If you can answer to the affirmative on all of these questions, you just might be ready to move forward as an angel investor. It really can be a great ride; you just need to be ready for the twist and turns that can easily surprise along the way.

* For series, references are published in the last installment of the series.

Angel Investing, Becoming an Angel Investor

Tweets that mention Ready to Become an Angel Investor? | Venture Hype — Topsy.com

[...] This post was mentioned on Twitter by Marc Nathan and Greg George. Greg George said: RT @venturehype: Ready to Become an Angel Investor? http://bit.ly/U8QdD [...]
bangaram

Thanks for the information. Yes,every one should be careful before investing and also investment must always be less than the net worth.
tongyun

Two things come to mind for those who are considering becoming an angel investor. One – do you have the money and are you willing to risk it? Two – do you have an iron stomach for the ups and downs that come with being an angel investor? For me, even if I had the money, I'm not sure I'd have the stomach for this type of business. If you do have the guts to become an angel investor, learn the art of due diligence because it's the details that will either make or break the start up company.
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http://venturehype.com The Hyper Team @ Venture Hype

Even though we eat, live, and breath angel investing, we always ask prospective angels to think hard before becoming an angel investor. It's highly rewarding, no doubt, but one could also lose the entire investment. It'd be wise for first-time angels to co-invest with seasoned investors to learn the ropes.

As for due diligence (DD), a research suggests that investors who spent more time on DD experienced a higher return.
http://venturehype.com The Hyper Team @ Venture Hype

Even though we eat, live, and breath angel investing, we always ask prospective angels to think hard before becoming an angel investor. It's highly rewarding, no doubt, but one could also lose the entire investment. It'd be wise for first-time angels to co-invest with seasoned investors to learn the ropes.

As for due diligence (DD), a research suggests that investors who spent more time on DD experienced a higher return.
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