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An angel investor is a person that evaluates and invests directly into early-stage, high-growth potential, private companies on a deal by deal basis. Angel investors contribute funds for short-term impactful growth plans, provide guidance and education on expectations, and usually take a more risky position in the company engagement, before Venture Capital (VC) investments would consider investing.
This contrasts with investing into a VC fund where the fund manager would select investments on your behalf and create a fund return expectation. This is known as being a Limited Partner (LP).
Accreditation describes an investor (individual or a business entity) that is allowed to invest in securities without being required to register with the SEC. They are entitled to this privileged access by satisfying at least one requirement regarding their income, net worth (including business equity), asset size, governance status, or professional experience.
For single individuals they must have $250k+ in annual income ($350k+ for married individuals) or have assets greater than $1M (including business, real estate, cash, investments – excluding your primary residence). For entities these requirements vary.
Direct – Individual angel investors can invest directly into the founders at the earliest stages. In this situation, direct investors will spend most of their time directly interacting with founders to determine which of the opportunities are the most promising. This can provide a very lucrative investment opportunity, but it also requires a lot of time to evaluate the investment opportunity. There are no fees, but there is no external validation either.
Venture fund – Investing in a manager to make the investments on your behalf which will be held for 10 years typically. As a result, Investors will pay the salary of the manager and team (via management fees usually 2% per year) and also 20% of the upside of the fund which is known as the Carry. Funds investment strategy varies according to their investment thesis, network and success factors, and other non-capital related material and resources.
SPV – Maintain flexibility by selecting opportunities on a deal by deal basis (usually keeping more of the upside), while also saving time seeing only vetted deals. Usually this builds a trusted relationship with the syndicator.
Direct – Most direct investors only get access to startups at the earliest stages (pre-seed / angel stage). If you are strategic then there might be opportunities to invest further along.
SPV’s – Depending on the depth of relationships the syndicator possesses, you could get access to deals as early as Pre-Seed Stage (when companies are just getting revenue). Like funds, each syndicator may have a different industry or stage focus. Some syndicators enable you to get into later stage deals, though they generally require higher investments.
Funds – Funds will invest at any stage Seed all the way through Initial Public Offering (IPO). As an investor if you can meet the minimum thresholds of investment – the fund will invest in companies that have $1M+ in revenue (typically known as Series A) all the way until the company is doing $100M+ in revenue.
It is important to diversify when investing in the venture capital industry. Your good investments will provide high returns but you will also see failures.
In SPV’s or Direct investments you should likely prepare to invest in 10 deals minimum over your investment career. You could invest anywhere from $5k to $1M in each opportunity. This can depend on what opportunities are afforded you OR access given by the syndicates.
For fund investments usually the minimums are $100k for small funds up to $100M for some very large funds (that only allow exclusive access).
The minimum check size to invest is $5,000.