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A few weeks ago we posted a newsletter titled “A new generation of angel investors”. We described how the rise of regulated startup investing has created thousands of new angels.
But we didn’t properly explain what an angel investor is, and how to become one. So today we’ll cover the following:
What an angel investor is
What angels look for in deals
How valuations work
Why diversification matters
Resources to learn about startup investing
An angel investor is someone who invests in private, early-stage startup companies. Angel investments are made in companies when they are quite immature. A company which an angel invests in is typically valued anywhere from $1 million to $100 million at the time of investment, depending on how much progress has been made, and how attractive investors believe the company is.
Prior to 2016, you had to be a wealthy “accredited investor” to invest in most private startup deals. However, this all changed from 2015-2016, thanks to the JOBS Act, a piece of legislation which enabled regulated startup investing (which is what we do at Republic).
Today anyone can invest in private startups on platforms like Republic.
Since we launched in 2016, our 700,000 members have invested more than $150 million across 200 companies (these figures include investments made with our affiliated investment advisor, which facilitates another type of angel investing). At any given time, we typically have dozens of startup deals to choose from. Minimum investments start at just $10, but are more commonly $50-100. Finally, everyone has the chance to be an angel investor.
We carefully screen all the companies raising on Republic, and only list approximately 2% of the companies which apply to raise money on our public platform. All companies crowdfunding are required to post certain financial disclosures in their Form C, which is filed with the SEC when using Reg CF or required to post certain financial disclosures in their Form 1-A, which is qualified by the SEC when using Reg A+.
What angel investors look for
Angel investors invest in companies based on their estimated potential. Here are common traits that angels look for.
Traction - how much progress a company has made
Team - how experienced and successful the team is
Product - is the product selling well? Is it a big market?
On Republic, you can learn about all these factors, and more, on each company’s deal page. There is also a discussion section where members can ask questions to the startup’s founder(s). You can browse our current offerings here.
Valuation
Angel investors agree with founders on a “price” to pay to invest in the company. This is known as the valuation. For example, if an angel invests $100,000 in a company at a $1,000,000 valuation, they own approximately 10% of the company.
Valuations (prices) are an estimate of the potential of the company. Companies with more “traction” (progress) tend to get higher valuations. The faster a company is growing, the higher its valuation tends to be. It is not uncommon to see startup companies growing revenue faster than 100% a year.
Here are some common valuation ranges for the different stages of startup investing. Keep in mind that these vary widely.
Seed: $2 million to $20 million
Series A: $8 million to $50 million
Series B: $50 million to $200 million
Series C-F: $200 million to $10+ billion
On Republic, we mostly offer seed and series A investments. This is an earlier stage of company development, where valuations are generally lower. So you are getting in earlier, but there is more risk involved. Some deals sell securities that are not linked to a company's valuation, in these cases you should review the investment documents carefully.
Building a diverse portfolio
Startups are high risk, high reward investments. Therefore it is important to invest in multiple opportunities. Many successful angel investors and venture capitalists recommend investing in at least 10-20 different startups.
If you only invest in one or two companies, the chances of finding a big winner are low. Some startups fail and result in a total loss. However, if you invest across a large number of promising startups, you will have a much better chance of investing in a company which has a large “exit” (IPO or acquisition).
Since our minimum investments are so low (most are $50 or $100), Republic is a great place for new angel investors to dip their feet into angel investing, and for more advanced investors to build a big diverse portfolio. Republic also has a unique feature called Autopilot that helps investors build a large diverse portfolio. You can learn more about Autopilot and why diversification is important here.
Now you’re ready to become an angel investor
Becoming an angel investor today is far easier than it has ever been before. Whereas angel investing used to require writing checks of around $10,000 per deal, today you can start building a portfolio of startup investments for just $50 per opportunity.
If you invest in two promising deals per month, in a year you could have 24 high potential startup investments. By investing in multiple deals, you’ll have a better chance of backing a highly successful startup as diversification is generally believed to reduce risk and increase chances of a return. And the experience you’ll gain will improve your angel investing skill set, and make you better at picking deals.
If you’re ready to start investing, head on over to Republic.co/Startups, where we have dozens of live deals. Each opportunity has detailed information on traction, team, the product, and more. There’s also a discussion section where you can ask the founders questions. Now go get started!
Further reading
If you’re not quite ready to start investing yet, there are dozens of excellent websites for new angel investors to learn from. One good place to start is by reading blogs of professional venture capitalists. There you can find insight into how they select startups to invest in, what industries they are focused on, and other helpful info.
Here are a few of our favorite blogs from successful, well-known VCs.
- AVC.com - Fred Wilson, co-founder of Union Square Ventures
- Both Sides of the Table - Mark Suster of Upfront Ventures
- Paul Graham of Y Combinator
- Tomasz Tunguz of Redpoint Capital
- Andreessen Horowitz articles - free articles from one of the top venture capital firms in the world
- Hunter Walk of Homebrew
- Above the Crowd by Bill Gurley of Benchmark
This educational article is provided by Republic to help its users understand this area of the market, it should not be construed as investment advice as it is impersonal, disinterested and was produced by Republic for Republic’s users, without remuneration received or expected.
