4 Tips for New Angel Investors

Amid the COVID-19 pandemic, many employees quit their jobs in search of entrepreneurship and the opportunity to author their own career path outside of more traditional paths. The U.S. Department of Labor reports that nearly 4.3 million people quit in January of this year as part of “The Great Resignation.”

As more people turn to entrepreneurship, the number of startups has increased across every industry, and, in turn, the number of opportunities for investment. Indeed, now may be an opportune time to become an angel investor; but, it takes much more work than throwing money at the first startup you see. 

What is Angel Investing?

To figure out whether you can become an angel investor, you must first understand the requirements. An angel investor is an individual who invests their money in startup companies in the hopes to earn back the investment — with a profit. 

Before becoming an angel investor, you need to become an accredited investor. According to NerdWallet, this requires that, “earned income must be $200,000 or more for the past two years ($300,000 with a spouse) or your net worth, alone or with a spouse, must surpass $1 million in investable assets.”

Next is knowing where to start. There’s more to angel investing than finding a random company and putting money into it blindly. 

Here are a few tips to keep in mind before investing.

1. Do your research (then, research some more!)

The first step to investing is finding a startup. Angel investing needs a lot of research along the way, but, arguably, the initial research is the most important. 

At a glance, what does the company you’re interested in do? An easy way to decide on the types of companies to pursue is understanding your interests, whether it be fintech, medical or otherwise. The first question to ask yourself is if the company aligns with your expertise. If not, do your research on the products or services the startup is offering and become an expert on the topic.

Next is familiarizing yourself with the team, especially the management team. This way, you learn how the company is run and what type of people you’ll be working with. 

Now, is the investment worth it? 

Chances are, this startup is not the only one in its specialized market. If the market is highly competitive, realize that your investment is much riskier than if there aren't other competitors. Discern whether the startup you're interested in has a unique and strategic plan to succeed among the other, similar startups 

2. Diversify your portfolio 

One of the worst things you can do as an angel investor is to put all your assets in one place. If one startup fails to take off, you’re left with no return on investment. 

A good rule to set in any sort of investment scenario is to diversify your portfolio. Find multiple companies that you believe look promising, considering the research you completed, and work on investing in them too. Because angel investing is a risky process by nature, you can increase your chances of success by investing in a variety of opportunities. 

3. Know the prices 

Past doing research on the startup itself, it's important to broaden your knowledge on the market they plan to go into. What are the prices on startups in, say, fintech, and how much are you willing to spend? Using that information, you can go into an investment knowing how much the company is worth, and avoid overpaying. 

4. Have patience 

Usually, a startup won’t become successful overnight. Depending on the type of startup you’re investing in, the timeline for their growth and potential success will change. A technology startup’s timeline will look different than the timeline for a food delivery startup for a multitude of reasons.

The timeline also depends on when in the  startup’s process you invest. 

Regardless, patience is an important quality to have as an angel investor. Though, patience should be paired with knowledge. A startup that seemed promising at the investment stage may not provide you with the pay-off you expected. In both scenarios, keep a close eye on the strategic moves the company makes and figure out from there the best course of action.