02 Aug How to Be an Angel Investor
We talk a lot about the gender funding gap here at Glass Half Funded (i.e., how women receive less than 3% of venture capital funding). In fact, the funding gap was actually the inspiration for the blog name!
Part of the reason women entrepreneurs receive less funding is likely because there aren’t enough women investors. According to a study by the Angel Capital Association, only 22% of angel investors are women. If we could get more women to be angel investors, I bet a lot more female-founded businesses would get funding. So, how do you become an angel investor? Keep reading to find out!
Let’s start with the basics: what is an angel investor?
An angel investor is an individual that invests seed money into startups in exchange for equity in the company.
Before you can start angel investing, there are a few things you need to know (hint: there’s a lot of rules).
The first requirement for being an angel investor is you have to be an accredited investor.
The Securities and Exchange Commission (SEC) first developed these accredited investor rules back in 1933 to protect potential investors. Investing in the private markets and startups can be really risky and the SEC wanted to make sure that only sophisticated investors could participate, to prevent ordinary people from losing too much money or getting swindled.
One consequence of these rules is that angel investing is now very exclusionary. With the significant wealth disparities across race and gender in the US, it’s no surprise that straight, white men are most likely to be in a position to take up angel investing.
The SEC adjusted the rules last year in a step to become more inclusive. The new rules include an additional way to become accredited that has nothing to do with income or net worth. While this is a great first step, many believe the SEC can and should go farther. If you’re interested in learning more about the changes, you can read more here.
So, let’s dive into the accredited investor requirements. If any of the below requirements are met, you’re considered to be accredited.
If you’re single, the annual income requirement is $200,000. If you’re married, the annual joint income requirement is $300,000. In either case, the annual income should be met two years in a row, with the expectation that the same level (or higher) of income will be made in the current year and the future.
Net Worth Qualification
The net worth requirement (which can be made individually or jointly with a spouse) is $1 million. Net worth is defined as a person’s assets (cash, physical assets such as cars and jewelry, investment accounts, etc.) less liabilities (car loans and any other debts). It’s important to note that a person’s or couple’s primary residence is excluded from the calculation for this purpose, even though it is typically included in a person’s net worth.
Financial Exam Qualification
The last (and newest) way to be considered accredited is by passing certain financial examinations. The exams that qualify are as follows:
Licensed General Securities Representative (Series 7): The Series 7 exam licenses professionals to sell and trade securities. The exam is administered by FINRA (Financial Industry Regulatory Authority). In order to sit for the Series 7 exam, candidates must sit for the Securities Industry Essentials (SIE) exam first. Depending on the state, candidates might also have to pass the Uniform Securities Agent State Law Exam (Series 63) exam. Candidates must be sponsored by a FINRA member firm in order to take the exam, meaning the only people who work in the financial services industry can take the exam.
Licensed Investment Adviser Representative (Series 65): The Series 65 exam licenses professionals to act as investment advisers. The exam is designed by NASAA (North American Securities Administrators Association) and administered by FINRA (Financial Industry Regulatory Authority). Although a candidate doesn’t have to be sponsored by a firm to register for the exam, simply passing this exam is not enough to be considered an accredited investor. To be accredited, professionals have to be “in good standing,” meaning being licensed with the appropriate state(s) as an investment adviser representative and complying with all state-specific requirements.
Licensed Private Securities Offerings Representative (Series 82): The Series 82 exam licenses professionals to transact in private securities. The exam is administered by FINRA (Financial Industry Regulatory Authority). Similar to Series 7, candidates require a firm sponsor in order to sit for the exam.
While the SEC’s attempt to expand the accredited investor requirements is a step in the right direction, you can see from the qualifying exams that the requirements are still very restrictive; only professionals in the financial services industry can sit for these exams. Additionally, the financial services industry is not very diverse to begin with, meaning that the rule expansion likely didn’t help as many women and minorities as men.
Angel investing can be intimidating if you’re new.
Angel investing is more than just becoming an accredited investor. It’s important to perform deep due diligence on the companies you want to invest in. Angel investing can be intimidating if you’re new. Thankfully, there’s a few programs (designed specifically for women) out there to help new angels learn and invest more confidently:
Fempire x SoGal: Fempire provides an investing bootcamp that consists of 10 modules, ranging from diligence and term sheets to active listening and strategy. You don’t have to be an accredited investor to participate in the bootcamp. So if you’re interested in angel investing but aren’t accredited yet, this bootcamp could be a great way to learn the basics before you actually invest!
You can read more about the program here.
Portfolia: Portfolia takes a community approach to its investments with the goal of empowering women to make investments in companies that have the potential for both high impact and high returns. They create funds based on a certain focus area (such as FemTech) and the fund is led by expert partners in that particular field.
The funds are then opened to any accredited investor until the fund fills up. Portfolia provides a way for women to learn about venture investing by watching pitches and participating in due diligence, even if they don’t have a strong background in investing. Portfolia provides educational materials in addition to the hands-on education of participating in the investment process.
Both Portfolia and SoGal are on my list of venture capital firms run by women. You can find the full list here.
Join a Group
Angel investors are often part of formal groups, either locally or online.
Here are some benefits of joining a formal group:
Pooling capital: Investing as a group means more capital to invest, which is good for both investors and startups. More invested capital means more impact for the startups receiving the money, which is critical in the early stages of a startup.
Multiple perspectives: Angel groups get together to listen to pitches. Having a group of people with different backgrounds and expertise can be a good sounding board to determine if an investment is actually a good idea.
Networking: A formal group provides networking opportunities to both meet other investors and other founders.
However, there are also some potential downsides with the group setup:
Invitation-only: Often, new members can only join if they are invited. This means it might be more difficult to join if you don’t have connections already.
Fees: These groups often have annual fees.
We’ve talked about being an accredited investor, educating yourself, and joining an angel group. If you’ve done these things, you’re ready to invest!
Keep in mind:
Angel investing can be very risky as most startups fail. Look at your angel investments as a percent of your total net worth and make sure you’re prepared to handle the risk. It’s also a good idea to talk to a financial advisor about how much risk you can and/or should bear.
In addition to the high failure rate, angel investments are also highly illiquid, meaning you can’t get your money back easily. It can take 5-10 years (or more) for you to get your investment back.
Usually, investment check sizes need to be $10,000 or more. Make sure your net worth can still be adequately diversified across asset classes and industries even with $10,000+ invested in any one company.