You Too Can be an Angel Investor

angel-investor

Are you a fan of Shark Tank and aspire to be just like Mr. Wonderful or Barbara Corcoran? Here are some tips on how you can become an angel investor and hopefully invest in the next Airbnb, Lyft or even Facebook.

How much do you really have to put in to be an angel?

Some investors like to put money behind every deal. They take the strategy of diversification and listen to the meta-analyses that you need to be in about 20 deals before you have a shot of hitting that big one. You never can predict what the next hit will be so they hedge their bets. Well known angel investor Mark Cuban said “I’ve learned that it doesn’t matter how many times you failed, you only have to be right once.” This kind of investor may put 2, 5, 10 or 50k behind each of about 10 deals a year. Some folks like to be choosier. They feel they have the knack (or desire) to pick the winners and thus make bigger investments behind them. These folks will put anywhere from $10k to $1M behind a deal.

What drives people to a group as opposed to going about it solo?

There’s nothing wrong with being a solo angel investor. When a person has the time, knowledge and resources to handle their own deal flow, gather diligence documentation, perform all back-office logistics, prepare legal/tax forms and do the multitude of other activities, that is great. However, many angels have full time jobs and thus are “part-time angels” that prefer to share these responsibilities with a group and ether hire their own folks or let a professional angel group management company/network handle it for them. They would rather review the deal summaries at their leisure (many angel groups have online deal rooms) and tap into the group’s expertise to make their individual decisions. They essentially want all the joys and to share the costs and headaches with others in exchange for a piece of the reward (most angel managers, like your typical “2 & 20” venture capital funds, take a membership fee as well a percent of the exit successes to cover their costs- all things the solo angel would have expensed on their own). Some people, even if successful solo angels, enjoy investing through group activities as well. Even if nor nothing else, they enjoy the networking and comradery with other successful and intelligent people.

What’s The Difference Between a “Club-Style” Group and a Fund Group?

An “angel fund” is one that is exactly like it sounds to be. A group of angels have put up (all at once or over a period of time) a set of funds to make investments based on a certain criteria established by the group and managed by the investment committee. These can be geographic based funds (i.e. “only middle Tennessee-based startups), industry-based funds (e.g. a “motion picture fund” or a fund solely for advanced materials) or whatever the group desires. Investments are made by a mutually agreed upon policy as opposed to individual members’ desire. No different than a venture capital or hedge fund, an angel fund runs its course of investment cycles, expenses are paid out of fund management fees, and then the fund is unwound after a set period of time and/or events.

A “club model” angel group is more akin to what you see on ABC’s Shark Tank (but without the editing and competing with each other for deals). The investors show up to the meeting (or read the online diligence) and decide a) which deals they want in on or not and b) how much they want to put in on each deal. Also, note that there are open angel groups and closed angel groups meaning groups that are either open to any accredited investor (these can be at a location or online) or closed to only a preselected group of individuals or those they invite.

Investors may or may not have a strong preference here, usually weighing on their parameters surrounding the logistics of low control over fund investing. As a member of a fund, you may be investing in businesses that compete against other businesses you are tied to or employed by as well as some people in business where potential conflicts of interest are highly scrutinized (i.e. in healthcare) their fund investment may limit their (or their company’s) ability to do things they otherwise may have wanted to do because of the potential conflict.