Did you know that roughly 3% of all companies will raise money from accredited investors to start and grow their businesses? These companies hope to be the next $100 million, if not $1 billion companies to break onto the scene and disrupt their industry. But because many will not succeed, the SEC has limited this type of investing to wealthy people who can afford to lose their money.
Earlier this year, six women wrote and published Impact With Wings: Stories to Inspire and Mobilize Women Angel Investors and Entrepreneurs to encourage more women to become angel investors. They met in 2013 as participants in the Pipeline Angels, an angel-investing bootcamp for women. Whether you’re a man or a woman, you can learn from these women about the risks and rewards of angel investing, and apply those insights to actionable steps in your own financing journey.
Balancing Risks and Rewards in Angel Investing
Since this is a risky asset class, there are nine questions you should ask yourself before you take the plunge. The questions were developed by Susan Preston, a venture capitalist, professor, co-chair and a lead instructor for the Angel Resource Institute, a global investor and entrepreneur education organization, and frequent instructor for Pipeline Angels.
3 Financial questions to ask:
- Do you have the income or have the assets to be an angel investor? Accredited investors are individuals whose net worth is greater than $1 million (excluding a primary residence) or whose individual income exceeded $200,000 ($300,000 for couples) for the past two years with the expectation that the income will continue in the current year.
- Can you afford to lose your investment without impacting your lifestyle?
- Do you have the money to broker multiple deals? Success in angel investing is based on the law of averages. No single investment is a guaranteed winner, but by investing in a portfolio of a minimum of 10 companies, or, ideally, 20 companies, the odds are that you’ll succeed. It takes an average of five to eight years to get a return on your investment.
Assessing your commitment:
- Do you have the 40 to 50 hours and sometimes 80 to 100 hours per company to spend doing the due diligence? Data shows that the more time you spend on analysis, the more likely you are to get a good return on your investment.
Should you not have the time, new ways to participate in syndicates are emerging. Plum Alley sources and vets the most promising women-led private investment opportunities to make it easier for accredited angel investors to invest, making it easier for them to be involved in the process as much or as little as they like. The Rising Tide US Fund I is a joint venture between Next Wave Ventures and Portfolia, an equity crowdfunding platform that presents consumer product company investment opportunities to accredited investors. The Rising Tide fund sources and vets companies through an investment committee of fund members, which are all actively participating in several different angel groups across the country. The fund secures up to one hundred investors who are willing to commit at least $10,000 each.
- Are you willing to give more than money to the company in which you invest? It may be that your expertise and connections are even more valuable for the up-and-coming entrepreneur. This is an important additional value angels can add, and one upon which your investment may rely.
Consider your motivation:
- Do you want a return on investment? If you don’t, make a donation to a nonprofit instead.
- Do you want to be useful in a variety of ways? Mentoring, advising, and connecting entrepreneurs can accelerate the target company’s development and be very rewarding to the investor.
- Do you want to give back to the community? Angels play an important role in funding high potential start-up companies.
- Do you like the entrepreneur and want to see her succeed?
I’ve been tracking the impact that training programs are having on the ability of female founders to raise early stage money. No surprise — it’s a lot! From 2010 to 2015, the number of women who not only have the money, but the risk tolerance and interest in this type of investing has more than doubled: from nearly 35,000 to more than 77,000. Since only about 3% of accredited investors become angel investors, there’s still plenty of room for growth. During the past five years, the number of women-led, angel-backed companies has increased 80%. In 2015, 29% of founders seeking funding were women and 24% of all angel backed companies were founded by women.
That’s a significant change that reflects an economic fact: Women control much of the wealth in this country and women also control much of the consumer purchasing. So it makes perfect sense that women are seeing market needs and building businesses together.