Three tips for when making your first angel investment

Contrary to popular belief, most angel investors are not millionaires. In fact, according to a recent article in Entrepreneur the average angel in the US earns between $60,000 and $100,000 a year...

There has never been a better time to be an angel investor. Investments are more accessible than ever before and the benefits of angel investing go way beyond just financial return.

Angel investments can be a way to learn about new industries, build your network, and see how various businesses work behind the scenes. Angel investing is the best professional development course you could ever take. Would you spend $10,000 on a professional development course that could change your life?

If you’ve been considering making your first angel investment. Follow these three easy steps and you’ll be investing alongside the best in the industry before you know it.

1. Do your homework: Understand the mechanics of a funding round

Paul Graham (right), founding partner at Y Combinator, recounts in one of his earlier essays that when he first decided to angel invest he found the entire process mysterious and complicated, only later did he discover that the parts of the process he thought were complicated were actually incredibly straight forward. 

We tend to over think how complicated early stage investment actually is. That said, there are some standard conventions that you should be aware of before you start. You’ll want to know what your options are when structuring a funding round, how companies are typically valued, and how most investors build a deal pipeline and select winners.

Lucky for you, getting up to speed on early stage investment standards keeps getting easier.  Programmes like 37 Angels, Pipeline Fellowship, The Insider’s Guide to Silicon Valley Investing, Future Investor’s free online course on angel investment, and resources like Female Funders and Venture Deals are all easily accessible and any one of them will give you the primer on you need to get started.

2. Understand your risk tolerance: Figure out how much you can afford to invest

Once you have a basic understanding of how funding rounds work. It’s time to decide how much you can afford to invest. Typical angel investments range from $10,000 to $50,000, but can be as high as hundreds of thousands to millions of dollars or as low as $1,000 on platforms like AngelList. 

The most important rule of early stage investment is not to invest money you can’t afford to lose. That said, we often underestimate our ability to afford angel investments. In a recent interview with Female Funders, prolific angel investor Joanne Wilson helped to reframe how aspiring angels should look at their investments: "How much money did you spend on vacations this year? For many, the amount of money needed to make their first angel investment is less than what they spend on their vacations."

3. Start investing

Like most things in life, angel investment is best learnt by doing. Luckily there are low risk ways to dip your toes in the water before heading out on your own. One great option is to join the syndicate of one of your favourite investors like Barbara Corcoran, Tim Ferriss or 500 Startups. As part of a syndicate you set the amount of money you’re comfortable investing in each deal (often as little as $1,000) and you can opt out of any agreement or stop investing at any time.

Other great ways to find your first investment would be to join a local angel group or start attend the start-up demo day of a local business accelerator or incubator. Once you get the hang of things, you can take off the training wheels and start building your own network of startups and investors that will create ongoing deal-flow.

Bonus Tip: How to avoid being a 'bad angel investor'

There really are bad angel investors. Don’t be one of them. The worst thing that you can do as an angel investor is lead start-ups on. If you decide you want to angel invest, make decisions quickly, and write cheques. Entrepreneurs will love you for it. Beyond that, the best way to maintain a reputation as a good angel investor is to treat the entrepreneurs you invest in with respect. Invest in people you believe in and then get out of the way and let them do what they do best.

Note: Before you write your first cheque, it’s important to understand any legal limitations there might be to what you can invest in. Most countries have the concept of accredited vs. non-accredited investors. Non-accredited investors, are generally restricted to friends and family rounds of financing and cannot participate in openly marketed deals on platforms like AngelList.

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