In 2010, two angel investors named Mike Walsh and Oren Michaels invested $5k each into the seed round of nascent transportation startup UberCab. 9 years later, after Uber went public, their $5k investments were valued at $24.8M apiece. 

Stories like this are what makes angel investing so appealing. Many of the top companies on the S&P 500 today started as venture-backed startups. Angel investors put money into startups in hopes that one becomes the next Apple, Amazon, or Uber. 

But becoming a successful angel investor requires more than money to invest. In a world where 7 of 10 startups don’t return any investment, knowing how to see and pick the right deals is everything. In this guide, we’ll explain how to become an angel investor using insights gained from our own startup investing via our fund, Hustle Fund.

For more, read Elizabeth Yin's "Learnings from a 6x angel investment portfolio" blog post.

What is an angel investor?

Let’s start with the basics. An angel investor is someone who invests their own money in privately-held companies. In the technology world, angel investors typically provide seed funding to early-stage startups. Because of their high failure rates, these startups are often seen as too high-risk by banks—making angel investors a vital source of risk capital.

Traditionally, angel investors are high-net worth individuals with backgrounds / institutional knowledge relevant to the companies they’re investing in. Along with capital, angel investors often provide their companies with guidance and introductions to clients, employees, and other investors.

Who can become an angel investor?

Due to the high-risk nature of early-stage startups, regulators attempt to limit access to these types of investments by making investors meet a certain standard of know-how and financial sophistication. For angel investors, this means meeting the accredited investor designation.

An accredited investor is an individual who meets one of the following requirements:

• Individual or joint net worth in excess of $1M (not including the value of a primary residence);
• Individual income in excess of $200k or joint income in excess of $300k for the two most recent years, with a reasonable expectation of reaching this level in the current year;
• Holding a Series 7, 62, or 65 license (Hustle Fund’s Angel Squad pays members’ Series 65 exam fee and offers a community support group to help people study). Note to be accredited via licensure also requires the individual to register with either the state or SEC as an Investment Advisor Representative for a Registered Investment Advisor (RIA). The RIA can be the individual's own firm.

It’s the responsibility of the issuer of unregistered securities (i.e., the startup) to ensure that an investor meets accreditation standards. Only raising from accredited investors can exempt a startup from certain required legal disclosures whenever there’s a sale of stock (e.g., during a fundraising round).

Notably, a 2012 revision to the JOBS Act made it possible for startups to raise up to $1M from non-accredited investors. This has led to the rise of companies like Republic, that allow retail investors to participate in startup fundraises.  

How to break into VC as an angel investor

Assuming you meet legal requirements, the next step is to formulate your framework around investing. Here are some steps you should consider taking:

Learn the risks of angel investing

As previously mentioned, early-stage startups are high-risk investments. Most angel investors understand and accept the possibility that they’ll likely lose all their money on a deal. That’s because—as our Uber example showed—it only takes 1-2 successful investments for angel investors to make all their money back, and then some. The power law nature of early-stage investing is why angel investors typically adopt a strategy of broadly indexing, hoping to capture as many big winners in their portfolio as possible. 

Develop an investment thesis

An investment thesis is a reasoned argument for a particular investment approach. As an angel investor, your investment thesis should be derived from your own research and understanding of the market, areas of interest, and financial situation. An investment thesis should help you create a profile of the types of companies you want to invest in, including their stage (e.g., seed, Series A, etc.), industry, location, and valuation.

Market yourself

As an angel investor, you can’t invest in a startup if nobody offers you allocation. And if you want allocation in the best deals (i.e., the most promising startups), you have to be an investor founders want on their cap table. A lot of this comes with building up a track record over time as a value-add investor in successful startups. But when you’re just starting out as an angel investor, an effective way to overcome adverse selection and win allocation in good deals is by building and promoting a personal brand. 

A lot of investors do this through content creation: they write and tweet about investing, strategy, and other topics related to their areas of investing interest. Of course, it also helps to lean on personal and professional networks for access to deal flow. Services like Angel Squad and AngelList can help investors network in the industry and see more startup deals. It’s likely that your first few deals will come via introductions from more established investors. 

Learn to evaluate deals 

Once you start seeing deals, the next step is picking the right deals to invest in (also known as “due diligence”). To determine if you’re investing in the “right” deal, consider filtering all deals through a series of questions:

1. Does it align with my investment thesis? If not, is there a good rationalization for investing outside your area of expertise?
2. Does the company have 100x potential? Remember, VC is a home run business. Every startup in your portfolio should have the potential to return the entire portfolio.
3. Does the company have traction? An early-stage company should have either some customer traction (i.e., users of their product) or some financial traction (i.e., revenue). 
4. Will the company be able to raise another round of financing? Companies die because they run out of money. Angel investor reputations improve when the startups in their portfolio go on to raise subsequent rounds of financing. As such, you should be able to see a path to future funding for any startup you invest in.
5. Does the company have good signal? For newbie angel investors, good signal is when a more experienced, well-regarded VC is also investing in the deal. This implies to the market that the deal is worthwhile, and typically attracts broader investment. The presence of a reputable investor also increases the likelihood that the startup will be able to raise subsequent rounds of financing. 
6. Why are the founders letting you invest? In a world of abundant capital, it’s fair to be skeptical as to why an angel investor without an extensive track record would be given allocation in an otherwise “good” deal. If you can’t think of a good reason (e.g., you have a personal relationship with the founders), chances are the startup is having trouble raising, which is bad signal.

Of course, these factors only apply to inexperienced angel investors. As you see more deals, you should learn to “pattern match” the characteristics of a good deal, even before there’s signal. Eventually, experienced angel investors become signal in their own right, where their interest in a deal implies that it’s a quality investment.

Win allocation

We describe allocation as something angel investors have to “win” because, if a deal is worth investing in, chances are the founders aren’t having trouble finding suitors. While a good brand and reputation can get you in the room, winning allocation as a newbie angel investor also requires some degree of cooperation.

Founders generally set aside a certain portion of the fundraise for small checks from angel investors, but all must invest on similar terms, and don’t get much say by way of valuation or control. This is mostly a function of leverage—your small check isn’t going to move the needle too much for the business. Founders will offer angel investors allocation because they believe having them on the cap table will be a value-add for the business, but they expect them to be flexible in negotiation.

As such, you should aim to set expectations with founders around your investment process, including the number of meetings you require, and the amount of access you need to make a decision. Being transparent allows founders to decide if they want to go through with your process. 

Size your check

Because angels invest their own money, many can only afford to cut relatively small checks (typically $5k-$25k). Check sizing is a function of how much allocation you’re offered (if it’s a hot deal, the startup may limit the amount you can invest), the startup’s valuation, and your level of belief in the business. Keep in mind that the larger the valuation (which is often negotiated between the founders and the lead investors), the more it’ll cost you to purchase a meaningful equity stake. 

At the same time, if you’re just starting out, investing as little as $1k in deals can be a great way to earn more allocations (because founders can usually make room for very small checks, given the investor is a value-add), test your investment thesis, and fund more companies. Hustle Fund co-founder and general partner, Elizabeth Yin, wrote more about the benefits of $1k checks on Twitter: 

Build a diversified portfolio

To mitigate risk in angel investing, many investors attempt to build a large and diversified portfolio of investments. This means having a variety of companies (at least 20+) across a range of sectors. By having exposure to many deals, angel investors increase their chances of being part of a 100x+ investment.

Building a diversified portfolio also means always being on the lookout for the next great deal. Good angel investors are continuously working their network, engaging online, meeting with founders, and attending events where they can get exposure to deal flow (visibility into new startup fundraising rounds). 

Support your portfolio companies 

Getting involved in your portfolio companies post-investment provides a feedback loop to determine if you made a good investment decision (which can then inform your diligence process going forward). Serving your portfolio companies well can also help you get exposure to new deals.

Reputations in angel investing are made by being a value-add investor. This means providing your startups with good counsel, helping them navigate headwinds, introducing them to potential employees, customers, investors, and other service providers, and not being a nuisance.

This is also where specialization comes in handy. As an angel investor, it helps to lean into your core competencies, and market them as your value-add to founders. For example, if you have a background in PR / comms, offering to support portfolio companies with a media strategy is a great way to differentiate yourself from other would-be investors. 

Remember that founders run in tight circles. If you serve one founder well, chances are they will refer you to their friends.

Be patient

Early-stage investors typically wait anywhere from 5-10 years before they see returns from their startup investments (assuming they see any returns at all). It’s important to have patience as an angel investor and stomach the early losses.

Remember: angel investing is about power laws. Your losing investments don’t matter as long as you have at least one excellent returner—and you typically won’t know if you hit on a great company for several years. In the meantime, the best thing you can do is continue to find ways to support your portfolio companies to improve the chances that one ends up making it big. 

Angel investing resources

Back in the day, to become an angel investor, one had to run in the right tight-knit Silicon Valley circles. Thankfully, today the process is a lot more democratized thanks to the changing regulatory landscape, new companies that promote startup investing, and professional organizations and programs that train would-be VCs on the tricks of the trade. 

Here are some recommendations for tools and services aspiring angel investors should consider:

AngelList

AngelList is a platform that makes it easy for angel investors to invest small amounts in venture funds and SPVs (special purpose funds designed to invest in a single startup). With 1k+ fund managers on platform, there’s plenty of investment options for angel investors to choose from. AngelList also has tools that make it easy to track your performance, discover new deals, and connect with other investors.

Republic

For non-accredited investors, Republic can be used to discover and invest in startup deals, as well as deals in real estate, crypto, and a host of other sectors. 

SeedInvest

Unlike AngelList and Republic, SeedInvest is an equity crowdfunding platform, meaning there are lower investment requirements (and non-accredited investors can also participate). SeedInvest vets every startup that applies to be listed on their platform, ensuring quality deal flow.

Hustle Fund’s Angel Squad

For those looking for access to deal flow and the institutional knowledge to improve their investing skills, there’s Angel Squad. Angel Squad is a program that teaches members how to angel invest and provides investment access to top-performing startups in Hustle Fund’s portfolio. Members will be invited to hear live pitches from Hustle Fund portfolio companies, attend virtual and IRL networking events with Hustle Fund’s 1.1k+ members, and receive guidance and training from Hustle Fund managing partners, including Elizabeth Yin and Eric Bahn. Learn more >>>

FAQs

How much money do you need to become an angel investor?

To become an angel investor, you need enough money to meet the accredited investor requirements:

• Individual or joint net worth in excess of $1M (not including the value of a primary residence);
• Individual income in excess of $200k or joint income in excess of $300k for the two most recent years, with a reasonable expectation of reaching this level in the current year;

You can also angel invest without meeting these net worth requirements if you hold a Series 7, 62, or 65 license.

Do angel investors get paid back?

Angel investors get paid back when one of the companies they invest in experiences a liquidity event. The most common types of liquidity events are an IPO or acquisition by another company. Angel investors may also be able to sell their equity stake to another investor without the startup itself going under a change of control. 

Note, liquidity events are exceedingly rare. Angel investors should be prepared to never be paid back on a majority of their investments.

Is angel investing tax free?

Angel investing is not tax free. Realized returns from angel investing are typically taxed at the long-term capital gains tax rate (assuming the asset has been held at least 3 years), which tops out at 20%. You can offset those capital gains by writing off capital losses from angel investing.

Note that many angel investors also save on capital gains by utilizing the qualified small business stock (QSBS) exemption, which allows U.S. investors to exclude or defer federal capital gains taxes upon sale of the stock.

Become an angel investor via Angel Squad

Angel Squad has been teaching individuals how to become angel investors for years. If you’re ready to join a fast-growing community of executives, operators, creatives, and visionaries, visit our website >>>