Should You Become an Angel Investor?

February 4, 2020

As you accumulate wealth, the question of what to do with your money starts to loom large in your head. One idea that comes up frequently is to invest that money in someone else’s startup, also known as angel investing.

After all, we’ve all seen the stories on TV of the savvy business person who got in on the ground floor of Instagram or Snapchat or Waze, only to sell their company to a tech giant for billions — and we’ve all thought that we could do the same. But is angel investing worth the risk?

What Angel Investing Looks Like

First, something you might not know — not just anyone can be an angel investor. Rule 501 of the SEC regulations defines an “accredited investor” as follows:

“Any natural person whose individual net worth or joint net worth with that person’s spouse at the time of his purchase exceeds $1,000,000 excluding the value of the primary residence”;

OR

“Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;”

Obviously, you don’t have to be an accredited investor to give money to a startup that you want to be a part of. You can write a check to whoever you want. But companies that raise money from accredited investors are exempt from a lot of securities filings with the SEC and state regulators, so they’re likely to turn money away from unaccredited sources.

According to a Forbes report from 2017, the average check written by an angel investor is around $36,000 and the median is $25,000, with most checks falling between $5,000 and $100,000. But are those investors making their money back?

Huge Risk, Huge Reward

The numbers on successful exits are sobering. The 1659 investors surveyed said that on average, 11 percent of their portfolios yielded a positive exit. Taking into account “zombie” companies, whose value stagnates after investment, 39 percent of companies that actually achieve an exit are positive exits.

The fact is that small business is risky. The generally accepted number is that half of new businesses fail in the first five years, so there’s a good chance that you’ll never get your money back. That’s why angel investors tend to build portfolios of a dozen or so investments. But angel investing is a lot like fishing — you’ll remember the big ones you landed, but not the bait you wasted waiting for a bite.

In truth, the name “angel investing” is a little misleading. The word “investing” tends to imply that you’ll make a reasonably predictable return in the long run, as with stocks, bonds, or real estate.

Instead, think of angel investing like gambling. You might lose everything you put into it, or you might get lucky. If there’s a startup or creative project that you truly believe in then, by all means, help get it off the ground. But don’t get into the business of angel investing thinking you’re going to strike it rich.

Talk to First Western Financial

Every person’s plan for their wealth is different, and everyone prioritizes different goals. Maybe you want to retire in comfort and travel the world. Maybe you want to make sure your grandkids never have to worry about tuition. Or maybe you want to leave a lasting legacy of successful startups.

No matter what your goals, come talk to First Western Financial. We pride ourselves on a holistic approach to finance, taking every aspect of your financial picture into account to create a plan and a portfolio that’s unique to you. Ready to take investing into your own hands? Give us a call.

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