A growing trend among startup companies is the utilization of angel investment groups for seed capital to get the ball rolling. With many technology companies successfully started by these types of groups, the field is continuing to grow at an accelerated rate. In our article, we’re going to teach you how to start an angel investment group in 5 steps and explain what an angel investment group is.
General Information about Angel Investment Groups
The first section in our how to start an angel investment group article will focus on identifying what an angel investment group is. In short, an angel investment group is a group of individuals who seek to help startups establish themselves by providing much-needed capital.
In exchange, angel investors are typically given convertible debt from the company or ownership equity for their funding help. To be considered an angel investor, it’s important that you are able to qualify as an accredited investor. To become an accredited investor, you must make at least $200,000 a year or hold at least $1 million in total assets. However, the value of your main home cannot be used in this calculation.
While this amount is the minimum to be qualified as an angel investor, the reality is that you will likely need much more capital to be successful as an angel investor. In many cases, angel investors may choose to invest in as many as 15 or 20 companies at a time to help diversify their risk portfolios.
The Benefits of Being Part of an Angel Investment Group
Though many people will opt to become an angel investor on their own, there are many benefits to forming an angel investment group instead. For starters, it makes it easier to raise large amounts of capital to expand the number of companies you will invest in.
In addition, you will be able to spread the responsibilities of the organization evenly amongst all members. This helps substantially decrease the workload for each member involved.
How to Start an Angel Investment Group in 5 Steps
1) Get Your Financial Affairs in Order
The first step we will cover in our article on how to start an angel investment group is to get your financial affairs in order. As mentioned earlier, it’s important that you and any members you are interested in inviting are all accredited investors.
While there is no government agency or official board that grants accredited investor status, companies you are interested in investing will take some measures before working with you. They will be required to ask for documentary evidence to establish that you meet the base qualifications.
There are some good documents to have on hand for any filing requirements companies may have for you. These include yearly profit and loss statements, prior year tax returns, and checking and savings account statements. All of these forms can help establish your status as an accredited investor.
2) Familiarize Yourself with the Potential Risks
Understanding the potential risks of angel investing is the second step we will cover in our piece on how to start an angel investment group. Just like any other type of investment product, angel investments can carry significant risks. One moment of carelessness can easily wipe out any capital that you invest in the company.
The result is that you take a net loss on that particular investment. However, it’s important to note that angel investments typically carry even more risks than traditional investments.
The reason for this is that companies that angel investors invest in are brand new. Therefore, they do not have established track records for their performance. While it is possible to gain a huge return on a successful investment, more than half of angel investments tend to lose some or all of their initial startup money.
With this in mind, it’s best only to invest money that you and your colleagues are comfortable losing. This way, you cover your back in the event of an investment failure.
3) Do Your Research
The third step we’re covering in our article on how to start an angel investment group is to do your research. Before you form your group, consider signing up for seminars and other presentations from entrepreneurs as well as other angel investment groups in your area.
You can use these types of events to ask questions and see how established angel investment groups work. This information will come in handy when forming your own group. This step will help you to avoid many common pitfalls that new groups encounter.
As for sitting in on entrepreneur workshops, these settings will allow you to start networking. As a result, you will get a feel for the type of presentations you and your fellow angel investors will be participating in regularly.
4) Establish Your Niche
Now that you have done a bit of research, it’s time to establish your niche market. Most successful angel investment groups invest in startups that they have some degree of experience with.
Take into account all of the collective experiences the members of your investment group share. Some popular business sector examples include real estate investing, telecommunications, healthcare, and energy.
A great tip to remember when considering new members for your group is to seek people with experience in many different fields. This will help diversify the types of companies your group can invest in.
If you and your fellow investment group members do not have any background knowledge of a particular industry, it’s often best to avoid investing in it. If your group is really interested in a foreign field, you can do some more in-depth research first and then build your strategy from there.
5) Set Specific Roles and Guidelines
Any successful angel investment group will have specific roles and established guidelines for a myriad of different scenarios. Common examples of positions that no organization should be without include chairman and treasurers.
It also helps to have someone dedicated to consistently networking at various trade organization showings and other important venues. In addition to establishing certain key roles, you should also work to draft a set of rules and regulations as well.
One of the most important rules to establish from the beginning is the period that each position is held before an election is needed. This allows members to cycle out people in each position. This step is particularly important during periods of under-performance where new leadership is necessary. Additional regulations to consider adopting include membership guidelines, funding requirements, and a core mission statement.
As long as you understand the potential risks of angel investing, forming your own angel investment group can be a lucrative endeavor for you and your partners. By conducting your research beforehand and keeping the 5 tips mentioned in our article in mind, you can help increase the likelihood that your angel investment group will be a success. If you have any angel investment group tips you would like to share, feel free to post them in the comments section.