What Is an Angel Investor—and How Can You Become One?
Want to put your money where your mouth is and invest in ideas you truly believe in? Here's how to support early-stage companies as an angel investor.
An angel investor is like the guardian angel of an early-stage company—not only do they provide startups with capital; they are often there to guide companies and founders with strategy, marketing, and important introductions.
Early-stage investor Hitha Palepu got her start in angel investing by cold-emailing a brand she really loved. Palepu's job at the time required her to travel a lot and wear formal, conservative clothing that she never really felt great in. But when she discovered M.M.LaFleur and found their dresses to be "thoughtfully designed, fashionable, comfortable, and always appropriate," Palepu struck up a friendship with the company's founder and asked if she could invest. It was the first of many companies founded and led by women that Palepu would add to her portfolio. "Early-stage investing in brands and in founders that I felt seen and recognized by and admired was my way of [generating wealth] on my own beyond the traditional ways of investing," says Palepu.
Only 3 percent of women-founded companies received venture capital in 2019, according to a report by Crunchbase. "Investing in female-led businesses helps to bridge the gap, create greater equality in the workplace, and boost innovation with women primed to create new solutions to old problems," says Lindsey Taylor Wood, founder and CEO of The Helm, an early-stage venture firm that invests in companies founded by women. Wood says that women are often very generous with charitable giving, but doubt themselves when it comes to investing and generating wealth. "Understanding the basics alone can radically change the potential for amassing more wealth," says Wood.
Here are ways you can become an early-stage or "angel" investor in companies that you believe in, according to women who have done the same.
Figure out how much money you're willing to part with.
Have an honest conversation with yourself about how much money you can invest and if you're OK with waiting a long time to see returns. "Most experts recommend allocating 10 to 15 percent of your total investment portfolio to angel investments given venture capital is the riskiest asset class," says Wood.
In fact, the likelihood of you not seeing that money again is very high. "If you consider VC funds, they earn back the fund from returns from one to two investments—not all of them are going to work out," says Palepu. Because of the risk associated with early-stage investing, Palepu recommends refining your search and really evaluating who you're investing in, and at what stage.
Become an accredited investor.
See if you meet the qualifications to be an accredited investor. Wood says most founders require you to be one, but some will still let you invest regardless.
According to Regulation D of the Securities Act of 1933, an accredited investor is someone who has had an income over $200,000—or $300,000 with their spouse—for the past two years and will continue to earn that amount for the current year.
Don't meet the qualifications for an accredited investor? You can still invest in early-stage companies. Palepu suggests looking into equity crowdfunding platforms like Republic, where you can invest in companies starting at $10. "There are some phenomenal startups and funds that have been raising capital off Republic—it's a great place to get started," says Palepu. IFundWomen, one of Palepu's portfolio companies, is a crowdfunding program for women-founded businesses that is another great option to explore if you want to invest and support but are not in a place to write a big check.
Speaking of checks, many early-stage founders will accept one that is $1,000 or $5,000. "The standard you hear is $25,000 but I have written small checks and a number of companies have been extremely grateful to receive it, and I've been grateful to be able to participate in those rounds at a smaller level," says Palepu. Especially for companies raising angel and pre-seed rounds, smaller checks are still very helpful.
Find companies and founders you believe in.
Look for companies and founders that you believe in and align with your values. When she first got started in early-stage investing, Palepu says she found opportunity in businesses that she was already a fan of—not just of the product but of how the company was being built. "What is it about the founder that makes you believe they are going to be the one to pull off what is always going to be a bold idea?" says Palepu.
Things you should look for in a founder? "Scrappy as hell, knows how to stretch a dollar, really focused, adaptable, coachable," says Palepu. Because even if the idea and numbers look great, if the founder doesn't have those qualities, it's likely the company won't be a success, and will not be a wise investment of your money.
It's also important to look for founders who are creating the right kind of company culture. A question Palepu always asks founders is how they take care of themselves. "I'm making a bet in them, but I also want to make sure that these are good people who are building a strong culture and taking care of themself as they embark on a really difficult process," says Palepu.
Wood says that investing in companies founded by women gives you the opportunity to make money and do good. "I find that female-founded companies are more likely to implement solutions, products, policies, and cultures that address the very issues that plague them, like equal pay," says Wood.
You are investing both time and money into these companies—so do your research and make sure an idea is worth both.
Know when to exit.
If a company you invest in is doing really well, has successfully raised its first few rounds, and you have an opportunity to cash out because a VC wants to buy out the early investors—Palepu's advice is to take that opportunity. It doesn't mean you no longer love or support the company—it means you did your job right. "It just means that your investment paid off in that company, and that they're able to continue to grow and scale and secure later stage investment," says Palepu.
Be a values-based consumer.
If investing in companies isn't the right move for you right now, Palepu recommends being a values-based consumer, so you can support your favorite businesses while staying within budget. "You can be a backer and a supporter of incredible businesses with a few dollars," says Palepu. Even if you're not an official investor, Palepu suggests tracking the companies you're supporting on a spreadsheet to see how they're growing. You could also build a relationship with the company, and if you're in a position to invest down the line—and they're raising funds—you can start building out your portfolio and network that way.
"Investing doesn’t have to be risky, and most people—despite misconceptions about investing being only for the wealthy—have enough money to start now," says Wood.
If you do become an accredited investor, Palepu suggests checking out Pipeline Angels for an "incredible" bootcamp in angel investing. "If I knew about them when we were just getting started, I most certainly would have done it," says Palepu.
Being an angel investor and investing in general—especially for women—helps create opportunity for change. "When women have more money, they have more power," says Wood. "And with economic equality comes greater social and political reform." Investing your dollars in people and causes that are important to you will help you generate wealth and create solutions to problems you want to fix.