AA Spark: Getting Started in Angel Investing

Angel investors are high-net-worth individuals who invest in high-growth technology startups that have the potential to provide outsized returns. Most of the big tech companies — Google, Facebook, Apple, Amazon, etc. — started out with the help of angel investors. Without angels, tech startups lack the initial funding they need to survive, bring their products to market, and contribute to the regional and national economy.

There are many benefits to becoming an angel and investing some of your capital into this asset class:
  • Potential for high financial returns
  • Portfolio diversification
  • Giving back – help entrepreneurs succeed through mentoring, advising, or serving on a board
  • Seeing the ‘next cool thing’
  • Making a difference — contribute to growing the local and regional economy and create high-paying jobs.

SIX TIPS TO GET STARTED IN ANGEL INVESTING

1. Determine whether you’re eligible to become an angel investor. You need to be an accredited investor which is defined by the SEC as individuals or families with an annual income of at least $200,000 (individual) or $300,000 (family) or an investable asset base of at least $1 million.

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2. Join an angel group. Joining a group is a great way to meet and learn from experienced angels, find investment opportunities (“deal-flow”), collaborate on due diligence, and leverage your money with additional angel capital. I highly recommend joining a group before you get started. There are hundreds of groups nationally, and 14 groups and counting in Michigan.

3. Explore the Michigan Angel Community website to learn more about the Michigan angel investment ecosystem. The Michigan Angel Community is a new initiative, supported by the Ralph C. Wilson, Jr. Foundation and Ann Arbor SPARK, to increase angel investment in Michigan through education, networking, deal-sharing, and benchmarking. It was designed to help new angel investors get started and accelerate existing groups. Reach out through the Contact page with questions and for further guidance.

4. Attend some of the many other local and regional entrepreneurial events:

5. Get involved at your local incubator or accelerator. Michigan has developed a large network of incubators and accelerators, which are often affiliated with one of Michigan’s SmartZones. Incubators and accelerators provide office space, services, education, and events to help local startups grow, and often act as an anchor for a region’s entrepreneurial activity. Therefore, they are a great place to network with entrepreneurs, learn about the local startup ecosystem, and find opportunities to invest and/or lend your own expertise.

6. Educate yourself and understand the basics:

  • Angel investment is a high-risk, high-reward asset class.
  • Angel investments shouldn’t make up more than 10 percent of your overall investment portfolio.
  • Returns can be quite good, on the order of 20 percent annually, if done right.
  • Diversification is key. On average, 50 percent of your angel investments will fail and return $0. Most of your returns will come from 10 percent of your portfolio companies. So, develop a portfolio approach, ideally investing in 10-20+ companies over time, to mitigate losses and maximize returns.
  • Conduct due diligence on each investment opportunity to understand the startup’s team, product/technology, market, go-to-market strategy, and financials, among other things.
  • Understand term sheets and basic investment terms, including valuation.
  • The median angel check size per investment is $25,000. For each investment, it is wise to reserve additional dollars for future rounds to maximize returns.
  • Investor engagement with companies, post-investment, is correlated with better outcomes.

THE BOTTOM LINE

Ultimately, angel investing is a learning process on many levels, which is one of the most enjoyable things about it.

Recent census data show that Michigan has approximately 98,000 households with a net worth over $3 million. That means there are a lot of potential angel investors in our state. We need more people to become angels in Michigan. Angel investment is critical to the growth of new industries, to diversify the economy, and to produce high-wage jobs. Without the availability of angel capital in a region, startups either fail to grow, go out of business, or leave the region to find capital elsewhere. So, not only can you earn outsized returns, you can also help your local and regional economy by becoming an angel investor.

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