Contrary to popular belief, you don’t have to be a high-profile celebrity or venture capitalist to be an early stage investor in startups.
While in the past you might have needed a few hundred thousand or more to become an angel investor, there are now a lot of lower cost options that can give you access for a much smaller initial investment.
However, to be a successful angel investor you need to understand a few basics and have a genuine interest in supporting startups.
Think you fit the bill? Here are my tips for getting started:
1. Go small
Although some startups do turn out to be the next Uber or Snapchat, there’s still a high amount of risk involved in investing in young companies. For this reason, you should only invest as much as you’re comfortable losing.
A good rule of thumb, as proposed by tech executive and angel investor Tyler Willis here, is to dedicate no more than 10% of your net income to angel investment. Its also safe to assume that even if a startup you’ve invested in does well, it could take up to 10 years to become liquid – so be prepared to part with your money for a long time.
2. Diversify your portfolio
When it comes to investing in startups, putting all your eggs in one basket is the worst thing you can do. In order to minimise your risk, you need have a large, diverse investment portfolio.
By spreading your funds across say 20 startups, you’re casting a much wider net — and you only need one or two to succeed to make a great return.
3. Build your reputation
While you’re cherry picking great startups to invest in, it also works the other way. By becoming an investor, you’re becoming a part owner of the company. So, why should they take your money over other (possibly more useful) investors?
For this reason, it’s crucial for early stage investors to build up a strong reputation — to maximise what is known as ‘deal flow.’ This is the rate at which an investor receives investment offers from entrepreneurs and business owners. Often, this comes down to three things — a solid investment track record, strong personal brand and ability to add value to the startup.
If you are just starting out and don’t have a large amount of capital or a broad network in the startup community, there is another avenue for startup investing. Fund’d is a soon-to-be-launched platform that allows you to invest in a diversified portfolio of startups from $100. For more information visit fundd.vc.
Aaron LePoidevin is passionate about helping entrepreneurs and organisations fuel their innovation and growth. He has a particular interest in technology and how it can be used to improve innovation programs, venture capital and entrepreneurial performance.