Angel Investing
Angel investing means investing personal capital directly in startups, with responsibility for company selection and exposure to loss and uncertain exits.
By Nick Bryant, Co-Founder and CTO, SMB Investor Network
2 min read
Angel investing means an individual puts personal capital directly into a startup and takes on the risk that the business fails.
Why angel investing matters to your portfolio
A startup stake can go to zero while you still need cash for spending, family obligations or your own business. Investing directly also makes you responsible for choosing the company and reading incomplete information. A good product doesn't settle either question.
For an accredited investor, angel investing is a type of exposure plus a selection job. Before it earns a place in your portfolio, be clear about what it asks of your capital, your judgment and your time.
The Kauffman-supported study Returns to Angel Investors in Groups, published through the Angel Capital Association, studied investors in angel groups1. It is historical context, not a forecast for you: the authors discuss survivorship and self-selection, and the participants don't represent every angel. See the original angel research.
How angel investing is used
Hustle Fund's venture access overview separates direct investing, fund investing and fund-of-funds investing2. Hustle Fund sells venture products, so treat it as a commercial source; its vocabulary is still useful for seeing where the choosing happens.
Example: you're drawn to a startup in the industry you work in. You note that you'd be picking the company yourself, then ask whether your job and the investment could be hurt by the same industry downturn. Knowing the industry helps you ask the question; it doesn't answer it.
The angel investing versus venture capital funds comparison covers choosing companies yourself versus handing that to a manager. The accredited investor options guide puts both next to other private-market categories.
Common mistakes
Mistaking enthusiasm for a founder for an investment case leaves the chance of failure unexamined. Treating a reported value as spendable cash creates a separate problem even while the company keeps operating.
More startups don't automatically mean more diversification. Companies with different names can depend on the same customers, financing conditions or industry. Your private market portfolio map is the place to check those links.
Related terms
A fund of funds moves fund selection to another manager. Concentration risk explains how apparently separate holdings can share weak points.