A few years ago, I moved to Utah without a place to live and was crashing at a friend’s house until I could find a roommate. After a month of sleeping on the floor, I started to get desperate and asked everyone I knew if they needed a roommate. Finally, one afternoon at a work happy hour, my friend Corey mentioned his buddy Alex was looking for someone to fill an open room in his apartment. I immediately walked up to Alex and said,
“Hi, I’m Kelsey. I heard you need a roommate. Is it possible to come over tomorrow and check the place out?”
“Nice to meet you, too. Umm, sure.”
I signed the lease the following day and moved in 3 days later.
After about a year of living together, becoming best friends, and vetting each other’s Bumble dates, we started to have a bit of tension. There was just something about watching Game of Thrones together every night while inching closer to each other on the couch that just got me thinking - do I have a crush on this guy or is it the wine? I also feared, if something happens but this doesn’t work out, am I going to have to move out? Or will he? Will I get fired? Will my friends be mad?
I spent weeks going back and forth on what to do, so I decided to be responsible - I got drunk with him and our friends at our favorite bar, kissed him, and told him I loved him. Now, the story goes a bit deeper but I don’t have time for that today, but I can confirm we’ve been living together for over 5 years and dating for 4. Which leads me to today’s topic - angel investing. Because high risk can lead to high reward.
WTF is Angel Investing?
Angel investing is when an individual provides capital to a start-up, usually in exchange for convertible debt or ownership equity. This tends to be in the Pre-Seed, Seed and Series A round of financing.
What does Angel Investing and Hooking Up with Your Roommate Have in Common?
They are Risky - Hooking up with Alex for the first time was a big deal. For one, I was terrified I would lose my job (we had a pretty strict policy at work restricting us from dating co-workers). Secondly, I was worried about the awkwardness after the fact - what if he was a terrible kisser? What if we end up not liking each other and I have to move out? What if my parents found out? It all just felt so precarious. Angel Investing is highly similar - it is one of the most risky investments you can make. In fact, anywhere from 75% to 90% of startups fail. That means, you are much more likely to lose your entire investment than you are to make any return.
They are Long Term - When I first made a move on Alex, I remembered that even if the whole situation failed, I would still have to live with him until the end of the lease which at that point had just restarted. Therefore, I was invested for the long term even if things didn’t work out. Angel Investing is also a long term commitment. When you write a check to a startup, your capital is normally locked up for an average of 5-7 years. AKA, you won’t see any of that money, if ever, unless the startup has an EXIT. I will explain more later in the article.
They can Pay Off Big Time - While making a move on your roommate is highly risky, it paid off in the long run for me. Neither of us got in trouble at work (well, maybe just a little and we had to disclose to compliance), we kept all our friends, and we have been together now for over 4 years. I am also happier than I have ever been with anyone. Angel investing can have similar payouts. While the investments are highly risky, they can return much more than your average stock investment. In a recent study conducted by the Kauffman Foundation, it showed the average angel investor returns are 2.5 times their investment even though the odds of a positive return are less than 50%.
How does Angel Investing Work?
Angel Investing is a pretty simple concept in theory and I’m sure a few of you have said out loud, “Oh, this is just like Shark Tank!” However, the details of angel investing can get a bit more complicated. For the sake of this article, I am going to talk at a high level and walk through an example.
Example: Let’s say, you are an entrepreneur and just started a Euphoric beverage company called Euforia. The flavor is incredible, branding rivals Bon Viv, you have a decent cash flow, and are looking to expand the business. However, you do not have sufficient capital to expand on your own. Luckily, you are contacted by Zendaya who is interested in investing in your business. In this case, she would be your angel investor.
Before writing you a check, she asks to conduct due diligence on the business, what your exit plan entails and mentions that she can provide marketing assistance by plugging the brand on her social media. At this point, you both feel confident in the partnership and she offers you $100,000 in exchange for 10% of your business. Once the wire is sent to the Euforia bank account, you have received your first angel check and given away 10% of your business.
Can I Angel Invest?
In order to angel invest, you likely need to be an Accredited Investor. That means,
you earned income that exceeded $200,000 (or $300,000 together with a spouse or spousal equivalent) in each of the prior two years, OR
have a net worth over $1 million, either alone or together with a spouse or spousal equivalent (excluding the value of the person’s primary residence), OR
Why? I want to invest in the next Amazon and I’m not a millionaire. Well, that is because angel investing is highly risky and you may lose your entire investment. Therefore, regulations require you to be in a position where you could lose a decent bit of money but still be financially okay.
If you are not accredited, you can still participate in angel investing opportunities such as Equity Crowdfunding deals. This is a new phenomenon supported by Regulation CF which made it possible for non-accredited individuals to participate in startup deals. You’ve probably heard of crowdfunding (think about Kickstarter and GoFundMe), well equity crowdfunding is similar but you don’t just give the businesses money. You give them money in exchange for shares (ownership) of the company.
Things to Be Mindful Of?
Timeline - As I mentioned earlier, startup investing takes a long time. The average time period invested in a startup is 5-7 years. If you are considering angel investing, make sure to consider this and know you won’t have any liquidity for a while.
Exit Plan - You only make money with angel investing if there is an Exit. That means, the company is acquired by another business or the company goes public (IPO’s on the stock market). When making angel investments, it’s important to question the founder about their exit plan to understand their long term plan and what that means for you.
Diversification - You might be tired of me saying this by now, but I’m going to stress this once more. Do NOT put all your eggs in one basket. Especially with startup deals. Angel Investing should be secondary to your portfolio rather than the majority of your investments given its speculative nature. Sure, you might want to put all your money in your friend’s new seltzer brand, but chances are it’s going to fail. No offense to Ms. Elderflower Fizz.
Who is Running the Show - When making angel investments, you not only want to think about the business, you need to think about who is running the show. While you might be extremely excited about the seltzer company, you have to believe not only in the business but if the founder is able to execute on the business. In this case, you want to see if the founder has the skills it takes to run a consumer company and if they have the leadership skills to run a team. While angel investing is a lot of luck, you can improve your luck by doing your due diligence.
If there is a topic you want to discuss, please DM me on Instagram at @notyourbfsinvestmentadvice or email me at firstname.lastname@example.org. I also am building a company called Tardi to help individuals on their journey from cautious savers to savvy investors. If you’re interested in joining the beta, sign up here: https://www.tardiapp.com/
See you next week lover!
Disclaimer: All investment strategies and investments involve risk of loss. Nothing contained in this website should be construed as investment advice. Any reference to an investment's past or potential performance is not, and should not be construed as, a recommendation or as a guarantee of any specific outcome or profit.