Hustle Fund’s angel investor program, Angel Squad, is celebrating a new milestone – 2,000 members! To mark this moment, we’ve pulled together some tips about how you can become an angel investor, too.

(The top tip is, of course, that you’re invited to join Angel Squad, which helps folks from all walks of life get smarter about startup investing!)

Let’s start with an inspiring story…

In 2010, two angel investors named Mike Walsh and Oren Michaels invested $5k each into the seed round of nascent transportation startup UberCab. Nine years later, after Uber went public, their $5k investments were valued at $24.8M apiece.

Stories like this are what makes angel investing so appealing. Many of the top companies on the S&P 500 today started as venture-backed startups. But becoming a successful angel investor requires more than money. In a world where 7 of 10 startups don’t return any investment, knowing how to pick the right deals is everything.

In this guide, we’ll explain how to become an angel investor using insights gained from our own our fund, Hustle Fund.

What is an angel investor?

An angel investor is someone who invests their own money in privately-held companies. In the tech world, angel investors typically provide seed funding to early-stage startups. Angel investors are usually high-net worth individuals with backgrounds relevant to the companies they’re investing in. Along with capital, angel investors often provide guidance and introductions to clients, employees, and other investors.

Because of their high failure rates, these startups are often seen as too high-risk by banks—making angel investors a vital source of risk capital.

Who can become an angel investor?

Regulators attempt to limit access to these types of high-risk investments by making investors meet a certain standard of know-how and financial sophistication.

For angel investors, this means meeting the accredited investor designation. An accredited investor must meet one of the following requirements:

• Individual or joint net worth in excess of $1M (not including their primary residence)

• Individual income in excess of $200k or joint income in excess of $300k for the two most recent years, with a reasonable expectation of reaching this level in the current year

• Holding a Series 7, 62, or 65 license. Note that to be accredited via licensure, you also have to register with either the state or SEC as an Investment Advisor Representative for a Registered Investment Advisor (RIA). The RIA can be the individual's own firm. (FYI Hustle Fund’s Angel Squad pays members’ Series 65 exam fee and offers a community support group to help people study.)

It’s the responsibility of the startup to ensure that an investor meets accreditation standards. Only raising from accredited investors can exempt a startup from certain required legal disclosures whenever there’s a sale of stock (for example, during a fundraising round).

There was an interesting twist a few years ago: a 2012 revision to the JOBS Act made it possible for startups to raise up to $1M from non-accredited investors. This has led to the rise of companies like Republic that allow retail investors to participate in startup fundraises.  

How to break into VC as an angel investor

Assuming you meet legal requirements, the next step is to sort out a framework around investing. Here are some steps you should consider taking:

Learn the risks

We’ve said this before: early-stage startups are high-risk investments. Most angel investors accept the possibility that they’ll lose all their money on a deal. Why are they cool with it? Because, as our Uber example showed, it only takes a couple successful investments to make all the money back, and then some.

The power law nature of early-stage investing is why angel investors often adopt a strategy of broadly indexing, hoping to capture as many big winners in their portfolio as possible.

Develop an investment thesis

An investment thesis is a reasoned argument for a particular investment approach. Your investment thesis should be derived from your own research on the market, areas of interest, and financial situation.

The thesis should help you create a profile of the types of companies you want to invest in, including their stage (eg, seed, Series A, etc), industry, location, and valuation.

Build a personal brand ‍

You can’t invest in a startup if nobody offers you allocation. How do you become someone that founders want on their cap table? By building up a track record over time as a value-add investor in successful startups. But for those just starting out, you need to build a personal brand. A lot of investors do this through content creation: they write and tweet about investing, strategy, and other topics related to their areas of investing interest.

It also helps to lean on personal and professional networks for access to deal flow. Services like Angel Squad and AngelList can help investors network in the industry.

Learn to evaluate deals

Once you start seeing deals, the next step is picking the right ones to invest in. Consider filtering all deals through a series of questions when doing your due diligence.

1. Does it align with my investment thesis? If not, is there a good rationalization for investing anyway?
2. Does the company have 100x potential? Remember, VC is a home run business. Every startup in your portfolio should have the potential to return the entire portfolio.
3. Does the company have traction? An early-stage company should have either some customer traction (ie, users of their product) or some financial traction (ie, revenue).
4. Can the company raise another round of financing? Angel investor reputations improve when their startups go on to raise subsequent rounds of financing.
5. Does the company have good signal? Good signal is when a more experienced, well-regarded VC is also investing in the deal. This implies to the market that the deal is worthwhile.
6. Why are the founders letting you invest? If a deal is that great, it's fair to wonder why a newbie investor like you is being given allocation. If you can’t think of a good reason, chances are the startup is having trouble raising, which is bad signal.

Of course, these factors only apply to inexperienced angel investors. As you see more deals, you should learn to “pattern match” the characteristics of a good deal, even before there’s signal. Eventually, experienced angel investors become signal in their own right, where their interest in a deal implies that it’s a quality investment.

Win allocation but be clear about your expectations

We describe allocation as something angel investors have to “win” because, if a deal is worth investing in, chances are the founders aren’t having trouble finding suitors. Winning allocation as a newbie angel investor can require some degree of cooperation. Founders set aside a certain portion of the fundraise for small checks from angel investors, but all must invest on similar terms, and don’t get much say by way of valuation or control.

Still, set some expectations with founders around your investment process, including the number of meetings you require, and the amount of access you need to make a decision. Being transparent allows founders to decide if they want to go through with your process.

Size your check

Because angels invest their own money, many can only afford to cut relatively small checks (typically $5k-$25k). Check sizing is a function of how much allocation you’re offered (if it’s a hot deal, the startup may limit the amount you can invest), the startup’s valuation, and your level of belief in the business.

Keep in mind that the larger the valuation (often negotiated between the founders and the lead investors), the more it’ll cost you to purchase a meaningful equity stake. But if you’re just starting out, investing as little as $1k in deals can be a great way to earn more allocations, test your investment thesis, and fund more companies.

Build a diversified portfolio

This means having a variety of companies (at least 20+) across sectors. By having exposure to many deals, angel investors mitigate risk and increase their chances of a 100x+ investment.

Diversifying also means always being on the lookout for the next great deal. Good angel investors are continuously working their network, engaging online, meeting with founders, and attending events where they can get exposure to deal flow (and visibility into new startup fundraising rounds).

Support your portfolio companies

Getting involved in your portfolio companies post-investment provides a feedback loop to determine if you made a good investment decision (which can then inform your diligence process going forward). Serving your portfolio companies well can also help you get exposure to new deals.

Reputations in angel investing are made by being a value-add investor. This means providing your startups with good counsel, helping them navigate headwinds, introducing them to potential employees, customers, investors, and other service providers, and not being a nuisance.

For example, if you have a background in PR/comms, offering to support portfolio companies with a media strategy is a great way to differentiate yourself from other would-be investors.

Remember that founders run in tight circles. If you serve one founder well, chances are they will refer you to their friends.

Be patient

Early-stage investors typically wait anywhere from 5-10 years before they see returns (assuming they see any returns at all). It’s important to have patience and stomach the early losses. Remember: angel investing is about power laws. Your losing investments don’t matter as long as you have at least one excellent returner—and you typically won’t know for several years.

In the meantime, find ways to support your portfolio companies and help improve the chances that one ends up making it big.

Angel Squad can help

Angel Squad has been teaching people how to become angel investors for years. If you’re ready to join a fast-growing community of executives, operators, creatives, and visionaries, sign up for an initial tour and interview here.