What to know before you Angel Invest

I recently made my first angel investment in a pre-seed startup - one of the riskiest investments anyone can make.

Since startup investing can feel like a black box, I want to share how the risk-reward actually works - if done properly - and what it takes to get started.

[Not investment advice, given the extreme risk & constraints, which I’ll describe below]

To understand sophisticated startup investing, you must first grasp the 𝐕𝐂 𝐏𝐨𝐰𝐞𝐫 𝐋𝐚𝐰:

According to AngelList: “A typical [startup] portfolio 𝘮𝘪𝘨𝘩𝘵 𝘩𝘢𝘷𝘦 50% 𝘸𝘳𝘪𝘵𝘦-𝘰𝘧𝘧𝘴, 30% 𝘴𝘮𝘢𝘭𝘭 𝘸𝘪𝘯𝘴, 𝘢𝘯𝘥 1-2 𝘮𝘦𝘨𝘢-𝘸𝘪𝘯𝘴.”

In a [hypothetical] 100 investment portfolio:

Even elite VC firms like expect only ~1% to be grand slams among many strikeouts.

To make things even harder, you generally won’t know the results of your investments for many years. Sometimes over a decade!

But if your fund or investment just-so-happens to have picked a big-winner, you could be rewarded handsomely for your patience.

Who can Invest in Startups?

To invest directly in a startup, you must be an Accredited Investor, per the SEC.

You generally must either: a) earn a high salary ($200K single, $300K married), or b) have a net worth of $1M (excluding primary residence).

You also qualify if you have the valid securities licenses (Series 7, 65, or 82).

And if you invest directly from your own money, you are now an Angel Investor.

Where to find deals

The best opportunities require "deal flow"-knowing people in angel groups, VC firms, or founder networks.

And the most-promising founders are already being courted by the most-connected VCs and Angels.

So it’s wise to start introducing yourself to these key circles, and becoming someone founders can trust talking to.

How much are Angel check sizes?

Early-stage check sizes typically range from $1K-$50K.

The earlier and less-proven the startup is, the more willing they are to work with you on your terms. It’s okay to negotiate.

My advice: start as small as possible while you learn the space. Leave room in your budget to pursue more, small opportunities.

Should you invest?

Most people shouldn’t.

The combination of high minimums, extreme risk, and decade-long timelines makes this unsuitable for most portfolios.

But if you're accredited, have a safe area to allocate towards high (illiquid) risk assets, and want exposure to potentially-stellar growth, angel investing can be a small complement to a diversified portfolio.

Start small and learn as you go.

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