If you are interested in becoming an Angel Investor, this is the place to start. Angel investors provide early financing for early-stage startups before they are ready to raise venture capital.  Angel investing can be interesting, rewarding, and fun.  It is also extremely risky.

If you are an accredited investor with an interest in entrepreneurship, Angel Investing may be worth considering.  The best way to become an angel investor is to take it slowly.  Start by Assesses your tolerance for risk, educate yourself about the space, and find others to invest with you.

An argument for Angel investing is that it provides an investment diversification opportunity.  This is a new asset class, beyond the realm of stocks and bonds. But treat this with caution: it also comes with a whole new set of risks and challenges.  I think angel investing should be about suitable investments, but there must be an element of fun, community, interest, and intrinsic reward as well.

In this post, I cover: What an angel investor is, how angel investing works, the risks and rewards in becoming an angel investor, and how to get started.

What Is an Angel Investor?

Angel investors are individuals, sometimes families, who invest in growth startups.

Traditionally they are entrepreneurs with a successful exit who are interested in “giving back.”  Because of their experience with entrepreneurship, they provide both funding and also advice to startups.  They often take board seats and support startups with advice, access to markets, and connections.

The world of angel investing has opened up somewhat.  Today investors can be anybody with a high net worth: physicians, attorneys, executives anybody with a track record of success who want to expand their investment horizons.

Mostly they gravitate toward industries that they understand or invest with others who understand those industries.  If we, at the Westchester Angels, consider an investment in a medical product, for example, we will involve the physicians and hospital group in our network in the decision.

Insight and connection into the industry are critical and essential in minimizing the risk of investment.

Due to the risk and challenges of investing, angel investors are generally accredited investors who have $1 million in investable assets or $200,000 in annual income.  Other investors can invest through crowdfunding platforms, but the truth is that angel investing is spectacularly risky, takes a long time to pay back and you should never invest money that you can’t lose.

Note that if startups directly solicit you and you are NOT an accredited investor, they are at legal risk.  Pitching to non-accredited investors potentially changes their status and creates new regulatory issues for them.

For this reason, the Westchester Angels limits our membership to accredited investors.  (Though we do have events and opportunities for non-accredited investors to get involved.

Angel investing is an equity investment in a startup company.  Here is how angel investing works.

Startups in need of cash have two options: debt or equity.

In the debt scenario, the startup borrows money from a bank, institution, or investor, that they repay.

The problem with debt is that it tends to be short term.  There are also not very many places a startup can borrow money, and the process is purely transactional.

In equity investing, the investor takes an ownership stake in the company.  The problem for startups is that they don’t have a lot to offer.  Startups often do not have significant revenue, sometimes they don’t even have a full product.

These companies have an idea and some evidence that they can turn this idea into a very successful business that someone else will eventually acquire.  These are startups that are at the very beginning of a long journey to large scale success.

They can’t get loans based on the promise of the future and they are too small for venture capitalists, so that is where angel investors step in.

Angel investors fill the funding gap for promising startups.  They are a key part of the startup ecosystem.

How to become an angel investor

Angels investors provide early-stage capital that is much closer to equity than it is to debt.

Sometimes the investment is straight equity.  But often, angel investments are some form of a convertible note. These notes are an investment that starts as debt and then converts later to equity.

Where angel investing differs from other forms of investment is that the angels get involved.

Angel investors take a functional, not just financial, interest in the company.  They take seats on the board, serve in advisory positions, and sometimes take management roles.

There are plenty of opportunities to mentor and support businesses, make introductions, connect the company to resources, and generally move the business forward.

The idea is that “smart money” money combined with advice is most likely to generate a better return.  It is also more likely to help the company achieve its goals.  If you have the funds to support the company, the contacts to open some doors, and patience to help, you may be able to play that role.  Your investment can make the difference in getting a very rewarding company off the ground.

Angel investing can be rewarding but understand the risks as well.

For startups, angel investing can be attractive because it allows them to build a business.  An early-stage investment can be the difference between success and failure.

At the same time, angels generally take 25% to 30% of your company for the money it takes to get to the next level of investment.  This is a lot of equity and a lot of influence, so it is not something to take lightly.

Early-stage investments are extremely risky.

Angel investors are looking for the next big payout.  Peter Thiel’s investment in Facebook increased in value over 2,300 times before the initial public offering.  Early investors in company Uber, AirBnB, and Paypal have also reaped huge rewards that they would never have found investing in the stock market.

These are the big names, but many other investments generate 10, 20, even 30 times the amount of money that angel investors put into them.

However, for every startup that generates a 30 times return, there are at least 99 that don’t.  Investors have to sort through a lot of companies to find the ones worth investing in.  In fact, research suggests that over half of Angel Investments Fail, a third break even or return a small amount, and about 12% return 5x or more.

Angel investor returns

Expected Angel Investor Returns

This is after the Angels do everything they can to ensure they are investing in a successful business.  At the Westchester Angels, we only talk to about 5% of the applications we receive.  Of those maybe 10% get funded – we don’t have enough statistics yet to give meaningful results but we do have a few failures and a few dramatic successes.

So, if you are interested in becoming an angel investor know that the investments can outperform stocks, real estate, or other investments if the company does well.

But it is extremely risky, and it takes patience.  First, you may review hundreds of pitches before you find a company with promise.  Second, due diligence will take time.  Third, even after you invest, it will take years to generate a return.

In most cases, Angel investors only make money when the company exits, this is generally an acquisition but another, larger company.

It is also important to remember that this is not a liquid investment.  Selling your share is very difficult.  So it can take years to get a return, and if the startup doesn’t perform well, there is not much you can do.

The risk: you lose everything you invest and the time you put into the business.

Due diligence is key

There is a direct relationship between the amount of time spent in due diligence and investment outcomes.  This is even more important for Angel investors than Venture Capitalists because there is less to go on.  As an Angel investor, you must be very comfortable with the team and what they can deliver.  A small misunderstanding at this level can completely derail the investment for the future.

A study by the Ewing Marion Kaufman Foundation found that investors who spend more than 20 hours on due diligence to significantly better than investors who spend less than 20 hours.  Those investors in the top quartile, with returns greater than 7x their investment spent over 40 hours on due diligence.

One risk that we see repeatedly is new Angel Investors do not spend enough time in due diligence.  One value of being with a group is that the others in the group open your eyes to opportunities and challenges.  They help you understand the investment better and the group can support each other with more due diligence insights.

For us due diligence starts with screening (check out our screening tool here), and continues through the pitch and every interaction that we have with the startup.  We will post our due diligence outline, but also check out the Angel Capital Association outline here.  Much of due diligence is getting to know and understand the team.

The five reasons people become angel investors:

  1. The potential for a return on investment.
  2. Great stories to tell.  We have seen some very entertaining pitches and had great conversations.  At the Westchester Angels, we have a couple of companies almost ready for an exit, which will give us some bragging rights. We look forward to that.
  3. It is a great way to give back to the business community.  If you have some experience that you can share, participating in an angel investment can be very rewarding.
  4. A great community.  We have fun, you meet interesting people and stay connected with compelling startups and interesting entrepreneurs.
  5. Participating in building the future.  And maybe, at some point, you will have bragging rights.


How to become an angel investor

To become an angel investor, you must learn how to invest, find the companies to invest in, evaluate them, and get support through the process.

We have had a few people come to one investor meeting, make an investment of tens of thousands of dollars on the spot, and call it a day.

As far as I know, they have all lost their money.

The problem is that there is often an expectation that picking companies to invest in is easy.  But it isn’t.  A good pitch piques your interest, but it is in due diligence that you really learn something about a company.

There is a reliable correlation between the amount of due diligence and the success of an investment.  Due diligence in groups also helps because people are naturally better at assessing the viability of an idea in an industry they understand.

You also want to avoid putting all of your money into one investment.  Even if you know with absolute certainty that a business will succeed and generate outsized returns, there is a greater than 50% chance it will fail.  So, invest a smaller amount in multiple companies, create a portfolio of investments.

This is another advantage of investing as a group: together, you can make meaningful investments across a broad portfolio of companies.

What we recommend to get started in Angel investing is:

  1. Find a group to invest with. This will improve your deal flow.  It will also improve your due diligence, and give you access to a wider variety of companies.
  2. Review a few dozen pitches before you even think of investing in one. No matter how great a pitch is, wait.  Participate in due diligence a couple of times, see what works and what doesn’t.  Give it time.
  3. Learn what you can about early-stage investing. There are a lot of resources available; you might also check out our Bootcamp.
  4. Focus on the numbers and facts when investing. Fight the urge of emotion, desire to follow the herd, or invest in a great pitch.
  5. Support those companies where you feel that your money and advice (as an individual or group) can make a real difference.

To get started with angel investing, learn how to do it.  Listen to other questions, participate in a few due diligence calls.

Investing alone adds even more risk than is inherent in angel investing.  There is value in a group.

When choosing startups, it’s essential to consider both profit potential and any nonfinancial returns associated with the investment. You may value engagement and participation in the process as more important – or as important as making money.  At the Westchester Angels, we are serious about investing, but we also like to have fun along the way.

Other Frequently Asked Questions

What rate of return to angel investors expect

Angel investors expect their money back trough an exit within 5-7 years. They are targeting an average return of over 20% over their portfolios, so they are looking for companies that they believe have the potential to return 30 times or more the money they invest.

Are Shark Tank investors angel investors?

The investment style and size of Shark Tank is in the real of angel investing.  Our pitch evenings can feel like Shark Tank – except we are not as obnoxious…

Why Do Angel Investors Invest as a Group

Investing as a group gives everyone in the group access to a wider variety of companies.  It also makes investing in portfolio of companies easier – many investors working together can invest in many companies.  Finally you have access to a much wider range of expertise, contacts adn industry knowledge when it comes to due diligence.