Investing in startups can be risky, but it can be very profitable for those willing to take a chance. The best way to invest in startups is by becoming an angel investor; here's what you need to know about how this works:
What Is an Angel Investor?
Angel investors are individuals who invest money into early-stage companies. They typically provide seed funding (money) to help a startup get off the ground, or they provide additional capital to supplement an existing round of financing.
Angel investors are typically wealthy individuals, but they do not have any formal training in investing or finance. They may also be professional investors who aren't associated with a venture capital firm or business incubator.
How Do Angel Investors Make Money?
Angel investors make money in two ways. First, they can sell their stake to another investor or company at a higher price than what they originally purchased it for. Second, if the angel-funded company is profitable and has enough cash to pay dividends, it will pay out profits to its shareholders (including the angels).
The exit event refers to when an investor sells their stake in a company. An exit event could happen at any point during an angel's investment cycle: from before their initial investment until after they exit from their last investment into that particular business.
Some examples of exit events include an Initial Public Offering (IPO) and an acquisition by another company. Dividends are paid out as a percentage of how much money investors put into a given business venture relative to how much was raised by investors overall.
If an angel invested $500K into Company X during Series A funding but only participated in one-tenth of the total capital raised (or $5M), he would only receive 10% of any future distributions made by Company X (also known as "dividends").
Benefits of Angel Investing
Rewarding for Investors:
As an angel investor, you get to invest in a business that has the potential to grow into something big. This can be rewarding if your investment pans out and become profitable.
Potential for High Returns:
Many people go into angel investing because they want high returns. It is often possible to earn 5x or more return on your initial investment by buying shares in a company at a very low price and then selling them later at a higher price once it goes public or gets acquired by another business entity (such as Google).
May Offer Decision-Making Power:
While most angels don't have much decision-making power when it comes to startups due to their small stake in these companies, some founders do allow their early investors to make decisions about how the startup should be run based on their preferences and experience with similar projects before this one came about.
Drawbacks of Angel Investing
There are some drawbacks to angel investing. First, it requires patience. Suppose you're looking for a quick win and immediate gratification. Angel investing isn't for you.
On the other hand, if you've got money just sitting around and aren't sure what to do with it (or if you'd like to find ways to invest in companies without becoming an entrepreneur yourself) angel investing may be right up your alley!
Second, angel investments can be high-risk ventures. You might only get back some of your original investment (sometimes none). That's why many people who start angel investing choose to do so in small increments over time instead of putting everything into the first venture they see emerge from their office door one morning, waving a business plan and asking for $50 million on the spot.
Angel investing is a great way to get into the world of business. It's a great way to make money and can also be an excellent learning experience. To learn more about angel investing, check out our blog post on how angels make money.