Just because you have money and want to make and investment doesn’t mean that you can just become an angel investor. It is a process that involves a lot of time and energy on your part. Before jumping into the world of angel investing be sure to understand everything that it will entail and what you will get out of it.
Who does it
Angel investors come from all walks of life. They can be professionals such as doctors, lawyers or businessmen or seasoned entrepreneurs. In general, though, they are people who have the funds and desire to help out those with great ideas.
How it works
In order to become an angel investor angels need to meet the Securities Exchange Commission’s (SEC) definition of accredited investors.
When you are an accredited angel investor you are able to give a startup money. In exchange for the money you are giving them you get equity in the company.
It’s not like the stock market
Angel investing is a completely different game than investing in publicly traded companies. For example, in most cases as an angel you can’t cash out or trade your shares in a private company when things are looking bad. Usually, the one way that an angel investor can make money is if the company they’ve invested in has an exit event, such as an initial public offerings or acquisition. It’s important to keep in mind that it can take years for that to happen, if it ever does happen. Another thing to keep in mind that is significantly different than the stock market is that many startups may want you to be incredible involved, especially in the beginning of the company. They will go to you on advice for everything and may request to have phone calls or meetings at least once a week. That being said, it’s important to keep in mind that you should invest in companies that are in an industry that you know well so you can be helpful and help them, and you, succeed. It’s also smart to keep in mind that the startup community is relatively small and connected you and your reputation will be accountable for the help you give.
You’re investing in ideas and people
Startups are private companies that aren’t required to report their financials. Additionally, because they’re young they often don’t have much to report anyway. Therefore, you are really investing in the idea and the people at the company. You’re putting your faith in the fact that they can turn their idea into a profitable business with nothing to show for it at the moment. Make sure that you do your research and really trust in the people and the idea that you’re investing in.