Many may assume that angel investing is only accessible to the wealthy. Fortunately, that’s no longer the case. Through Regulation Crowdfunding, anyone with an interest in investing in early-stage startups can become an angel investor.
What is an angel investor?
An angel investor is an individual who invests in an early-stage startup, typically in exchange for a percentage of ownership or equity in the business. Companies at this stage are usually just starting to fine-tune and fully develop their product, go-to-market strategy, and sales channels.
Historically, these types of early-stage investments in private companies were limited to wealthy accredited investors. That changed, however, in 2016, when the SEC ruled to permit the sale of securities under Regulation Crowdfunding (Reg CF), which opened up startup investing to non-accredited investors. Now, the opportunity to become an angel investor is open to anyone, not just the wealthy.
How to become an angel investor
If you’re interested in investing in startups but don’t qualify as an accredited investor under the SEC’s guidelines, Reg CF offerings are a great option for investing in early-stage startups. Reg CF is a securities registration exemption under which businesses may raise funds through general solicitation. Reg CF offers an exemption from the registration requirements for securities-based crowdfunding, which allows companies to raise up to $5 million within a 12-month period without needing to register the offering with the SEC. While anyone can participate in a Reg CF offering, due to the risks involved, investors are limited in how much they can invest during a given 12-month period. These limitations are determined by the greater of an investor’s net worth or annual income.
A quick rundown on valuations
Now that you understand the basics of investing under Reg CF, it’s important to have an elementary understanding of how valuations work for companies that are early-stage and oftentimes pre-revenue.
A startup’s valuation is an estimate of what the company is worth. There are a lot of factors that go into estimating this number, including the strength of the team, the competitive landscape, sales, marketing, traction, and more. Naturally, investors want to get in at a good “price” and see the valuation (and their investment) grow from there. If you’re curious about how to go about calculating an early-stage or pre-revenue startup’s value, check out this blog that breaks down multiple common methods.
Criteria to look for
How can you determine if a potential startup investment is a good opportunity? There are many criteria an investor can consider, but three primary areas to assess are the product, user traction, and team.
- Product – How developed is the product, and is there a viable market for it?
- User Traction – Is the product in the hands of end-users? If so, are those numbers growing?
- Team – Does the team have relevant experience that suggests they could successfully lead this business?
For further reading on different ways to analyze a potential startup investment, we’ve got you covered. Here are a few more helpful posts to check out:
- Valuing a Startup Idea
- Interpreting Startup Historical Financials
- Assessing Startup Business Models
- Evaluating an Early-Stage Startup’s Traction
- Understanding the Value of a Startup’s Intellectual Property
- An Investor Guide to Startup KPI’s
- Appraising a Startup’s Market Potential
A note on risk
It’s always worth reiterating that startup investments are inherently risky. As a new investor, it’s important to make sure you’re aware of the potential risks and are comfortable with the idea that you could lose your investment in its entirety. In addition to our blog, our education center is a great resource for learning more about Reg CF and startup investing in general.
If you’re ready to start investing under Reg CF, make sure to sign up as an investor to browse our current Reg CF offerings and opt-in to our email marketing so that you don’t miss new investment opportunities.
The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.