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If you have been fortunate enough to attain great wealth over your life, you may have a desire to use it to help others realize their entrepreneurial dreams. If you do, that means you may want to become an angel investor. But before doing so, here are some factors to keep in mind.
What You Need To Know Before Becoming An Angel Investor
Accredited Investor Standards
Should you want to become an angel investor, it is best if you can meet what are known as accredited investor standards. To meet this criteria, you must have an annual income of at least $200,000 or a net worth of at least $1 million. As to why this is such a critical part of angel investing basics, it has to do with securities filings with the SEC and state regulators. For companies that raise money through angel investors, many exemptions apply regarding the information they must provide to federal and state regulators.
Understand the Risks
While it can be very rewarding helping an entrepreneur start what may become a successful company, it is also crucial you understand the risks involved with being an angel investor. In fact, studies show over half of all angel investors lose some if not all of their money. According to Money Morning, “But when researching angel investment opportunities, choosing the best startup companies to invest in may be tricky due to the risk involved. After all, research shows that about nine out of ten startups fizzle prior to achieving successful gains.” Therefore, make sure you know this going in, and also know just how much money you can afford to lose.
Learn About the Basics
Before you ever give your money to an entrepreneur, educate yourself on the angel investing basics so that you go into the venture with your eyes wide open. Since angel investing is growing in popularity, there are many methods you can use to learn all you can about it. Along with books and blogs, you should also attend a few workshops about angel investing. This will give you the chance to learn more details, talk to other angel investors, and get a better feel for if this is something you wish to pursue.
Possibility of Great Returns
While you may lose some or all of your money that you provide for angel investing, you may also catch lightning in a bottle and find yourself involved in a very profitable venture. While studies show many angel investors do indeed lose money, other studies also show that for those who hit on the right opportunity, their ROI is far superior to other types of private equity.
Plan Your Strategy
Before you jump in and hand over thousands of dollars to an entrepreneur who has a dream, take plenty of time to plan your investing strategy before you ever sign on the dotted line. Along with knowing how much money you can afford to invest, think hard about what types of companies of which you would want to do business. These can range from startup tech companies to those in the medical field or various other industries.
Develop a Network of Other Angels
Since you will still be learning angel investing basics, do as many others have and develop a network of experienced angel investors to whom you can turn to for advice when needed. If you try instead to go it alone, chances are you will make very costly and unnecessary mistakes.
Don’t Write the First Check Immediately
Though you may be convinced the entrepreneur you are considering helping has a can’t-miss million-dollar idea, don’t write your first check immediately. Based on research, most angel investors spend at least six months researching the opportunity prior to writing their first check.
In choosing to become an angel investor and help others become entrepreneurial success stories, you are participating in the ultimate game of paying it forward in today’s world.
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