When Jason Yeh tweeted out an invitation for people to join him in making an angel investment in a new tech company, he wasn’t expecting much. But then his phone blew up with notifications. All sorts of people were sliding into his DMs, eager to write a personal check.
“It just really opened my eyes to how much money is on the sidelines from [people with] different backgrounds who you had traditionally not thought about when it comes to finance or angel investing,” Yeh, whose Adamant Ventures makes fundraising resources for entrepreneurs, told Built In.
Historically, angel investors have been high-net-worth individuals. But with loosened regulations and the advent of crowdfunding platforms, now almost anybody can invest small amounts of their own money in individual startups for the first time.
What Is an Angel Investor?
Angel investment activity is growing. Total angel investments in 2020 were $25.3 billion, a 6 percent increase over 2019, according to a report by the Center for Venture Research at the University of New Hampshire. And more than 3,000 angel investors are expected to make their first deal this year (up from 2,725 last year), the New York Times reported.
The influx of new angel investors has massive implications on the tech landscape. Advocates say founders and entrepreneurs who have limited resources or connections could potentially have more access to capital earlier in the startup process. And loosened restrictions could mean everyday people now have the ability to generate wealth for themselves by making small investments in private companies.
Welcome to the era of angel investors.
What Even Is Angel Investing?
To turn an idea into a real business, founders need money. But unless they have an established track record or their business already has impressive revenue numbers, not many institutional investors will give them the time of day (since it’s so early in the process). That’s where angel investors come in.
Founders typically seek investments from angels after they’ve built a prototype of their product or service and need more money to prove it out in the market (this point in the fundraising process is typically called the seed or pre-seed round). They often tap into their networks — friends, family, professional colleagues — or connect with angel investment groups online, searching for people who have belief in their vision, deep pockets and an appetite for risk.
Interested angels may invest their own money into the company, and in return, they get an equity stake in it. The odds aren’t great that they’ll make more money than they put into any one company. Given the risk, many angels spread their investments across several startups, knowing most will fail but one could turn out to be a home run and more than cover the losses of the rest.
Why Does It Suddenly Feel Like Everyone Is an Angel Investor?
There’s an old stereotype that angel investing is only for a certain well-off kind of person. Entrepreneurs who got rich young, retirees with timeshares, mid-career dentists who want to add a little spice to their portfolios. If the stereotype is rooted in any reality, it’s the reality of a bygone era.
“That’s not the case anymore,” Swati Chaturvedi, co-founder and CEO of Propel(x), an online investment platform for deep tech startups, told Built In. “The demographics are really changing.”
From 1933 up until recently, the only way people could invest their own money in private companies was as an accredited investor. This meant they either had to have a net worth of $1 million (not including home value) or an annual income of $200 thousand (or $300 thousand total in their household). Angel investing, in other words, was only for the rich.
The Securities and Exchange Commission (SEC) saw this as a way to protect everyday people from blowing their money on risky ventures. (A 2017 report estimated the angel investment failure rate is 70 percent.)
Recently, though, the scope of who can participate in angel investing widened.
New Definition of Accredited Investor
The first thing that happened is that the SEC expanded the definition of an accredited investor. Even if people don’t meet the high net worth or annual income criteria, they could still be eligible for accreditation if they possess “financial sophistication.” Meaning, they work at a private fund, have investment subject matter expertise, or have taken and passed a certification exam.
This allowed many more people (young, especially) who work in finance, but have yet to generate much wealth for themselves, to invest in startups on their own. Or they could join groups called syndicates, or platforms like AngelList, where they pool together with other angels a bunch of small checks to invest in individual companies.
Meagan Loyst has noticed a demographic shift in angel investors as a result of the definition change. An investor at the early stage venture capital firm Lerer Hippeau, Loyst was the first person the firm ever hired from Gen-Z (the generation of people born between the mid-1990s and early 2010s).
In fall of 2020, Loyst founded a community called Gen Z VCs, which now has more than 9,000 members, many of whom are angel investors in their early-to-mid 20s. It’s not uncommon for them to discover and share startups with each other — and invest.
“I have friends who work in tech, they’re full-time operators during the day, and they’ll hear about companies, and they’re like, ‘Great, I’ll put in a few [thousand] myself,’” Loyst told Built In.
Rise of Equity Crowdfunding
Another shakeup occurred in 2012 when President Barack Obama signed into law the JOBS Act. Enacted in 2016 and updated in 2020, this new law allowed startups to raise up to $5 million over a 12-month period from just about anyone — including non-accredited investors — through avenues like crowdfunding platforms.
Almost overnight, everyday people were given the chance to invest in private companies in exchange for equity. Platforms like Republic, WeFunder and StartEngine — which look kind of like traditional reward-based crowdfunding websites, such as Kickstarter and Indiegogo — sprouted up to meet the sudden demand. They are designed to make investing small amounts of money in private companies relatively easy. People can invest as little as $100 in individual companies using these platforms.
And while equity crowdfunding, as it’s called, only represents a relatively small amount of the overall angel investment pie, it gives everyday people unprecedented access to participate in the startup fundraising ecosystem.
While angel investing is, for the time being, still mostly undertaken by venture capitalists, finance professionals and tech company founders and operators, it is much more accessible to “people who might not have launched and sold businesses and have millions of dollars sitting around,” Loyst said. “It’s becoming much more of a people’s game.”
“It’s becoming much more of a people’s game.”
These two recent developments — the expanded definition of accredited investor and the rise of equity crowdfunding — combined with the fact that many people are now hunting for alternative ways to get high returns on their investments (due to interest rates being low and the stock and real estate markets being hot, making traditional investments less lucrative) means money is flowing into early stage startups like never before.
That at least partially explains why so many people on Twitter and LinkedIn have “angel investor” in their bio.
What Motivates Angel Investors?
If you invested $500 in Uber’s seed round, your stake in the company would today be worth about $2.5 million. Stories like this compel people to angel invest.
But aside from the tantalizing possibility of investing in the next tech unicorn, what’s the benefit of investing your own money in individual startups, when the odds are so stacked against them?
Many people dabble in angel investing to gain meaningful exposure to founders and startups, which may in turn help propel their careers, whether it’s starting their own fund or getting into venture capital, Loyst said. “A lot of people start angel investing to start building their own track record, in the hopes it’ll lead to something bigger.”
It also “allows the everyday person to think about wealth creation and value creation in a whole new different way,” Loyst added. “You’re playing an integral role in building the companies of the future that you’ll be using, your children will be using.”
Angel investing is a way for people — tech professionals especially — to root for the ideas and individuals they want to see succeed, but whose circumstances preclude them from joining directly.
Stella Garber, the head of marketing at Atlassian’s Trello, has made about 20 personal investments in individual companies. Even before she wrote her first angel check in 2016, Garber knew she wanted to support other companies and founders she believed in.
“It’s a way that you can be part of other startup stories when you don’t necessarily have the time as an operator,” Garber told Built In.
Her first check was written shortly after meeting with her friend and colleague Sean Harper in a coffee shop, where he shared his idea of a home insurance startup called Kin (which recently announced it’s going public). Garber said she didn’t know much about the home insurance industry, but she believed in Harper’s vision. An angel investment was a vote of confidence in him.
Angel investing is also a way to back a first-time founder whose career trajectory you believe in, even if you don’t necessarily believe in their initial startup idea.
“Sometimes when you’re angel investing, you’re not investing in this specific company, you’re investing in the relationship,” Yeh said.
He added: “If you’re one of the first to support a really talented person before anyone else does, that person is going to remember you for the rest of their life.”
Why Do Startup Founders Need Angel Investors?
Founders turn to angel investors for money — that much is obvious. But in many cases, that’s not all they’re expected to bring to the table.
“Historically, especially angel groups and such, they like to roll up their sleeves and get more engaged with the company,” Chaturvedi said. “That is the ideal case.”
Loyst said that when she’s part of syndicating deals, she’s looking for angel investors who bring some strategic value to the table, in addition to capital. It could be experience building and scaling a startup, technical prowess, or even the ability to be an effective brand ambassador on social media.
“The value-add on the angel investor side can materialize in a lot of different ways,” she said.
“The value-add on the angel investor side can materialize in a lot of different ways.”
Bringing an angel investor on board typically means getting access to their network too, Yeh said. Word travels fast and people typically love talking about the startups they’ve invested in.
Yeh champions a concept he calls raising an “angel army.” Founders, according to this strategy, should consider bringing on angel investors whose money they may not necessarily need in order to get the business going, but whose presence on the investment team will attract other industry professionals and observers who trust that person’s judgment.
“That can be incredibly valuable,” Yeh said, “when it comes to raising more money.”