Bill Clark is the CEO of MicroAngel Capital Partners, a venture firm that gives more investors access to alternative investments. He also gives investors the ability to invest in startups online through crowdfunding. You can follow him on Twitter @austinbillc.
An angel investor used to be defined as someone with a high net worth. They typically have more than $1 million and privately invest money in startup businesses that are seeking capital. The SEC restricts investing in private deals to mostly accredited investors. I say mostly because there are some opportunities for non-accredited investors to participate on a limited basis. Thedefinition of an accredited investor in the U.S. is a person who either has a net worth (excluding a primary residence) of $1 million, an income of $200,000 per year for the last two years, or $300,000 in household income per year for the last two years.
Angel investing has gained a lot of popularity despite anxieties over the bubble bursting. You need to understand what you are getting into before making that first investment. The general rule is that you shouldn’t invest more than 10% of your net worth, since startups can be risky. Investments typically range from $25K to $250K, but with startups needing less capital to launch these days, the amounts are shrinking.
Aside from the accredited investor rule, you don’t need to have any additional qualifications to become an angel, but you do need to make sure you understand the following concepts.
1. Be Ready to Write the Check
Make sure you have access to your capital so that when you find a great startup you have the money readily accessible to invest. You don’t want to have to wait to liquidate a CD or a stock, or try to get money out of your IRA and watch a great opportunity pass you by. Also, you don’t want to waste the startup’s time if you can’t get access to your funds. You can develop a bad reputation if you start committing and backing out of deals at the last minute. The startup community is a huge network, and word travels fast if you are unpleasant to deal with.
2. Understand the Risk
The majority of startups fail. As long as you understand the investment may be risky and you might not get your investment back, then you are at least being realistic when thinking about investing. If you stress too much while writing the check, it means it may not be the right time for you.