Everything you wanted to know about angel investing, but were afraid to ask

Thinking about angel investing? It’s a worthy way to spend your time and can be quite lucrative if you choose the right opportunities – but there’s also a great deal of risk. After my previous career in product at Salesforce and PayPal, I turned my technical experience into a sidegig as an advisor, where I reveled in helping driven founders and their teams succeed. Eventually I became an early stage investor, joined the launch of Backstage Capital, and recently joined the launch here at Operator Collective.

Now that I’m 5 years in, I feel equipped to share some knowledge, namely the answers that would have helped me as I started out. Here are the most common questions I get about angel investing (and special thanks to Courtney Broadus for sharing her considerable expertise and perspective here too!). Got a question I missed? Please reach out

What is angel investing? 

Angel investing is the term used when an individual investor gives money to startups or early stage companies in exchange for an equity ownership interest. This is often done using a SAFE note, which is a form of convertible note, that gives you the right to purchase or “convert” to equity partial ownership in the company at a future date and/or when other criteria are met. 

How is angel investing different from investing in a venture fund? 

Angel investing is done on an individual basis and requires considerable due diligence. Investing in a fund is putting your money in the hands of the fund managers, whose job it is to vet the companies and use their expertise and network to make sound decisions. Venture funds can be lower risk than direct angel investments, depending on stage, diversification, and sector; however, the whole category is high risk.

How do I get started with angel investing?

Start by choosing a focus. Operator Collective and many of our members focus primarily on enterprise b2b, but others prefer different areas – such as consumer, healthcare, edtech, or impact investing. As you think, determine what you’d like to learn about through the process + what area you’re passionate about (in addition to returns). 

Next, look for opportunities. Be intentional – Your network may not know you have expertise in scaling, hiring, or a particular technology. So let them know you’re looking to invest and the area in which you’d like to focus. Research the VCs in various spaces; then connect and find out who they’re investing in. Finally, offer yourself as an expert to startups to build a network. Use your knowledge of the industry, products and services, operations, hiring, and more. Always look for opportunities to develop your own career, network, and knowledge while you work with founders.

How do I set a budget for angel investing?  

Angel investing is a high-risk investment. Consider it money you may lose completely – and if you’re not ok with that, don’t do it. Once you’re willing to accept the risk, parcel out a piece from the high-risk portion of your portfolio. You may want to set a yearly spend or a total spend, or you might simply consider each investment individually to gauge your level of interest. Whichever direction you choose, think about the total loss you’re willing to accept and stay under it for at least the first few years. 

How much is a typical angel investment?

There’s such a broad range of angel investments that there’s really no typical amount. Investments can be in some instances as little as $5,000 at the low end and $250,000 at the high end, though $25k and $50k are more common. Amounts are negotiable, based on what you can offer in addition to money (like your subject-matter expertise or network).

What if I don’t have a lot of capital to deploy? 

Get involved in other ways! What skills do you have that might benefit a startup? You can ask for equity compensation for advising a startup, which is usually a fraction of 1% over a 18-24 month vesting term (0.10 is common, 0.50+ is often only given to someone with deep domain expertise and/or devotes a material amount of time, 1% is unusual but not unheard of). You can also use your network as your investment – Whom do you know that could help a startup? 

How do I manage risk?

If you’re risk averse or don’t have time to do full diligence, consider co-investing with a group; this gives you coverage in a broader range of areas. Peer validation of your investments also helps you make a more informed decision. Use deal diligence to mitigate risk; but understand that at the early stage there often isn’t a lot of information available about the company and its customers, since many are pre-revenue, pre-product. Evaluating the team and its ability to focus and execute is often the strongest indicator you have to go on (vs trying to learn everything about the particular business).

What do I get out of angel investing?

It takes 7-10 years for most funds and investment portfolios to move to final outcomes (called exits). Typical exits are:

  • Late stage buy-out: Modest gains of usually 1.5x-3x
  • Pro-rata and follow on: The opportunity to invest more money in the next round to maintain or increase your equity stake
  • Acquisitions and mergers: Company gets acquired or merges with another, which can range from barely a 1x return to 3-4x typical. Most common type of exit.
  • IPO: Usually the very highest return, 4-10x
  • Company folds: Often you lose 100% of your investment, but usually you can write 100% loss off in taxes

How can I increase the certainty of a solid angel investment? 

Again, this is a high-risk form of investing with no sure bets most startups fail. But if you want to increase your chances of success, you’ve got to put in a great deal of time. Find deals you like from founders you believe in. Vet the companies as heavily as you can. Once you’ve invested, don’t just walk away check in, help out, stay involved. 

How do I find companies to invest in? 

  • Use co-investing groups and VCs you trust to build a pipeline
  • Join an angel investing group
  • Look for startup programs like accelerators and incubators, which often host Demo Days and offer opportunities for mentoring and advising
  • Network at meetups, conferences, and events
  • Start posting content on your channels to showcase your expertise 
  • Follow online content like newsletters and social channels
  • Talk to current and former colleagues, alumni groups, friends, and neighbors 
  • NOTE: Cold-call type leads can be more time consuming and challenging to sort though, especially if there’s not a reasonable connection to the founders or their industry 

We believe culture, diversity, and operational excellence are a key part of building truly great companies. Learn more at www.operatorcollective.com or by connecting with us on Twitter and LinkedIn.