Becoming an angel: how much do I invest?

If your information about angel investing comes from high profile investing celebrities, you may think that being an angel investor requires you to be a “self made business expert worth millions.”

In fact, there are many more angels than you might think based on TV shows – and they can invest effectively with a lot less than a million dollars.  

To be an angel, you need to qualify as an accredited investor, defined by the SEC as $1 million of net worth or annual income over $200,000. (I’m simplifying – the real definition is a bit more complex – but it gives you the idea.) You don’t have to own a professional sports team, or pass an exam. The national Angel Capital Association estimates there are over 4 million people in the US who fit the definition based on wealth.

And you don’t need millions of investable dollars to invest sensibly. Consider the investing activity of angels in a VentureSouth group. The minimum investment if a member chooses to participate in any investment opportunity is $5,000. (And there is never any obligation to invest at all if you don’t like the companies you see.)

Our members have written just over 1,000 separate investment checks across our entire portfolio. Many members invest at this $5,000 minimum: we have had 348 investment checks of $5,000. The median size of an individual investment is slightly higher, at $10,000 (another 341 checks), and the average slightly higher still, at $12,658 – because some investors write larger checks.

Any given angel investment is risky: most single investments lose money. It is only by having a diverse portfolio of “many small bets” that, on average, angel investing provides a positive return. (See our series on angel returns for much more on this.)

But how many is “many small”? Obviously the more the better, but general guidance suggests that 10-15 is sensible. (Some analyses and statistical work provides some support for this.) Let’s assume 15: 15 x $5,000 investments = $75,000. Not millions.

An even more efficient way to take “small bets” is to participate in our sidecar funds, like the Palmetto Angel Fund. Here, a minimum commitment was $50,000. This has been invested in 20 investments over the 2 year “investment life” of the fund – an average exposure per deal for an investor of $2,500 per investment – an extremely efficient way to take a large number of small bets.

So if you’re thinking about becoming an angel investor but don’t think you have enough in liquid assets to engage effectively in the asset class, perhaps knowing these investment levels will tempt you to learn more.