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Ask HN: How To Start Angel Investing Now

14 points by biznickman 16y ago

Hi All, So I have a question. I'm looking to start investing in a couple of startups and found AngelList thanks to a blog post linked to this morning on Hacker News. I was disappointed to find out that I need to be an "accredited" investor to join. The easiest requirement to meet it appears is having a net worth of over $1 million. I sold my company in December and have a few hundred thousand in cash but won't have a $1 million net worth until my first earnout date this coming December. Is it possible to start investing before that date? I write a popular blog and get A TON of startup pitches every day but it sounds like it could be difficult if I'm not SEC Accredited. What should I do? FYI ... this is the page detailing how to become an "Accredited Investor": http://www.sec.gov/answers/accred.htm

deleted 16y ago
[deleted]
epi0Bauqu 16y ago
Advise for equity.
seanMeverett 16y ago
You don't need to be an accredited investor to invest in startups. I did a lot of research back in 2007 when I started BlueStone Investments, a high-frequency ago trading firm. Basically the SEC requirements don't even apply unless you have a group of more than 10-15 investors (i.e., hedge fund). Thus, if you want to be independent or start a small angel fund, you don't have to worry about being accredited, you just have to worry about sharpe ratios of the investments you're pursuing (whether securities or businesses). I'm in the process of starting a few companies and need a bit more cash than I can liquidate at the moment, so we are looking for an angel investor around the $100k level for a year to fund leasing short codes (SMS) and marketing. We're not changing any user behavior but extending the functionality of a communication medium used by every mobile phone in the world. You can find my email in my profile if you're interested in chatting.
- gojomo 16y ago
  You don't need to be an accredited investor to invest in startups. True, but the most-promising/best-advised startups often avoid the risk and expense of taking money from non-Accredited Investors (or at least those who aren't close friends and family). So while it's technically possible, your ability to angel-invest is severely encumbered by the Accredited Investor rules.
- damoncali 16y ago
  You're mistaken. The SEC requirements most certainly do apply to individuals. A company has different obligations if it is taking money from non-accredited investors.
dnsworks 16y ago
It seems that in the past 3-4 months interest in becoming an angel investor has been popping up everywhere, kind of like a few years ago right before the real estate bubble popped and everybody wanted to become a real estate investor.
- callmeed 16y ago
  Are you saying we're in a seed/angel bubble now? Is that (really) bad?
  - damoncali 16y ago
    It's bad if you're a seed investor. It's also bad if you need a bigger VC round after you take a (highly) inflated seed investment round. This sort of thing happens when bubbles pop. (For the record, I don't think we're in seed bubble).
thrill 16y ago
You're free to invest in anything you want - short of a court order or some specific law about where your money is spent (i.e. no helping those on certain bad-boy lists of the US government), no one can stop you. The difference is that those seeking investment are limited in how they may approach non-accredited investors, ostensibly for the protection of the "little people", to use a phrase recently in the news. Much of this is driven by a (valid) concern for liability. I've personally been a part of a company that had accepted investments from non-accredited investors in its early days. One of those investors decided he wanted out early, before the stock had become liquid (i.e it was still privately held). He took the approach of arguing that he'd been taken advantage of in his ignorance of risk, and the company took the probably wise step of finding a way to undo his investment. Accreditation is not strictly a net-worth evaluation. If you are very knowledgeable person in a given area of expertise, a company may be comfortable with accepting your investment even with your lower net worth/ Your net worth is not strictly your cash in hand - if a reasonable person would value your forthcoming payout as worth $1 MM, then the corporate attorney for whomever you're interested in would likely be comfortable enough to advise his client to accept your money.
- gojomo 16y ago
  Your net worth is not strictly your cash in hand Excellent point, though I'd heard part of the recent Accredited Investor 'compromise' (in lieu of inflation-adjusting net-worth limits up to $2-million-plus) was to change the definition to consider only 'liquid' net worth. That could cause troubles for this net worth accounting method.
hristov 16y ago
I believe you can become accredited if you are director in the company you are investing in. If you are investing a significant amount of money it is probably a good idea to get on the board anyway, regardless of whether you need it to become accredited. By the way, this is not legal advice as I do not know the specifics of your situation, please consult a securities lawyer; he/she will be able to give you better advice for your situation.
Mankhool 16y ago
As the costs for creating a new product or service continue to be driven down, is there not an opportunity here for a new category of angel investors to meet the needs of startups that need ie., < 100K?
- joshu 16y ago
  In my experience, companies raising > 500k aren't hiring fast enough to grow rapidly. And if they are, they're almost certainly raising again almost immediately. There's plenty of business that can be built for that small amount, but they tend to be lifestyle businesses and as such are not particularly suitable for investment.
hugh3 16y ago
My advice, if you have a few hundred thousand in cash and want to start angel investing: don't. Don't angel invest until you have enough secure, low-risk investments sitting around that you can shrug off losing your first few hundred thousand dollars worth of investments, as you're very likely to do. If you have the kind of patience that an angel investor needs, then you'll have the kind of patience you need to wait for December.
- joshu 16y ago
  Well said. You ARE losing your first investments, and it will take 5-8 years to get anything back.
- biznickman 16y ago
  I still have some additional cash and am not spending all of it, but I'm willing to lose most of it as I have more coming. While they say don't count your chickens before they hatch, I also like a lot of the companies that I'm speaking with and would much rather spend money on them, than on some company that I have no idea how their business is functioning. Then again, if the sky was falling, perhaps it would have been smarter that I keep a large amount of cash.
axiom 16y ago
Maybe I'm just totally crazy here, but my feeling is that unless you have $10 million+ cash you really should not be investing in startups. It's just way way too risky. This is probably just my own personal risk tolerance, but you should not be investing more than 10% of your net worth into stratups (because you're very likely going to lose it all) and you should have at least ~10 investments in order to normalize your risk. Not to mention that you're probably tying up all the money you're going to invest for ~5 years until (if you're lucky) there's an exit. Again, this is purely just my own (admittedly conservative) risk tolerance.
joshu 16y ago
First start taking some meetings. Unsolicited pitches in my experience are less investable. Do some advisory work or something like that. There is no accreditation process - you just are allowed once you meet the rules. Please understand, though, that if you have a $1m net worth, you probably can't allocate more than 10% of that to angel investing, which means being in just a few deals if your minimum in is $25k or whatever. And it comes back to you slowly - I've been investing since 2006, in 38 deals so far, and I've seen exactly one exit so far.

14 points by biznickman 16y ago

deleted 16y ago

[deleted]

epi0Bauqu 16y ago

Advise for equity.

seanMeverett 16y ago

You don't need to be an accredited investor to invest in startups. I did a lot of research back in 2007 when I started BlueStone Investments, a high-frequency ago trading firm. Basically the SEC requirements don't even apply unless you have a group of more than 10-15 investors (i.e., hedge fund). Thus, if you want to be independent or start a small angel fund, you don't have to worry about being accredited, you just have to worry about sharpe ratios of the investments you're pursuing (whether securities or businesses). I'm in the process of starting a few companies and need a bit more cash than I can liquidate at the moment, so we are looking for an angel investor around the $100k level for a year to fund leasing short codes (SMS) and marketing. We're not changing any user behavior but extending the functionality of a communication medium used by every mobile phone in the world. You can find my email in my profile if you're interested in chatting.

gojomo 16y ago
You don't need to be an accredited investor to invest in startups. True, but the most-promising/best-advised startups often avoid the risk and expense of taking money from non-Accredited Investors (or at least those who aren't close friends and family). So while it's technically possible, your ability to angel-invest is severely encumbered by the Accredited Investor rules.
damoncali 16y ago
You're mistaken. The SEC requirements most certainly do apply to individuals. A company has different obligations if it is taking money from non-accredited investors.

dnsworks 16y ago

It seems that in the past 3-4 months interest in becoming an angel investor has been popping up everywhere, kind of like a few years ago right before the real estate bubble popped and everybody wanted to become a real estate investor.

callmeed 16y ago
Are you saying we're in a seed/angel bubble now? Is that (really) bad?
- damoncali 16y ago
  It's bad if you're a seed investor. It's also bad if you need a bigger VC round after you take a (highly) inflated seed investment round. This sort of thing happens when bubbles pop. (For the record, I don't think we're in seed bubble).

thrill 16y ago

You're free to invest in anything you want - short of a court order or some specific law about where your money is spent (i.e. no helping those on certain bad-boy lists of the US government), no one can stop you. The difference is that those seeking investment are limited in how they may approach non-accredited investors, ostensibly for the protection of the "little people", to use a phrase recently in the news. Much of this is driven by a (valid) concern for liability. I've personally been a part of a company that had accepted investments from non-accredited investors in its early days. One of those investors decided he wanted out early, before the stock had become liquid (i.e it was still privately held). He took the approach of arguing that he'd been taken advantage of in his ignorance of risk, and the company took the probably wise step of finding a way to undo his investment. Accreditation is not strictly a net-worth evaluation. If you are very knowledgeable person in a given area of expertise, a company may be comfortable with accepting your investment even with your lower net worth/ Your net worth is not strictly your cash in hand - if a reasonable person would value your forthcoming payout as worth $1 MM, then the corporate attorney for whomever you're interested in would likely be comfortable enough to advise his client to accept your money.

gojomo 16y ago
Your net worth is not strictly your cash in hand Excellent point, though I'd heard part of the recent Accredited Investor 'compromise' (in lieu of inflation-adjusting net-worth limits up to $2-million-plus) was to change the definition to consider only 'liquid' net worth. That could cause troubles for this net worth accounting method.

hristov 16y ago

I believe you can become accredited if you are director in the company you are investing in. If you are investing a significant amount of money it is probably a good idea to get on the board anyway, regardless of whether you need it to become accredited. By the way, this is not legal advice as I do not know the specifics of your situation, please consult a securities lawyer; he/she will be able to give you better advice for your situation.

Mankhool 16y ago

As the costs for creating a new product or service continue to be driven down, is there not an opportunity here for a new category of angel investors to meet the needs of startups that need ie., < 100K?

joshu 16y ago
In my experience, companies raising > 500k aren't hiring fast enough to grow rapidly. And if they are, they're almost certainly raising again almost immediately. There's plenty of business that can be built for that small amount, but they tend to be lifestyle businesses and as such are not particularly suitable for investment.

hugh3 16y ago

My advice, if you have a few hundred thousand in cash and want to start angel investing: don't. Don't angel invest until you have enough secure, low-risk investments sitting around that you can shrug off losing your first few hundred thousand dollars worth of investments, as you're very likely to do. If you have the kind of patience that an angel investor needs, then you'll have the kind of patience you need to wait for December.

joshu 16y ago
Well said. You ARE losing your first investments, and it will take 5-8 years to get anything back.
biznickman 16y ago
I still have some additional cash and am not spending all of it, but I'm willing to lose most of it as I have more coming. While they say don't count your chickens before they hatch, I also like a lot of the companies that I'm speaking with and would much rather spend money on them, than on some company that I have no idea how their business is functioning. Then again, if the sky was falling, perhaps it would have been smarter that I keep a large amount of cash.

axiom 16y ago

Maybe I'm just totally crazy here, but my feeling is that unless you have $10 million+ cash you really should not be investing in startups. It's just way way too risky. This is probably just my own personal risk tolerance, but you should not be investing more than 10% of your net worth into stratups (because you're very likely going to lose it all) and you should have at least ~10 investments in order to normalize your risk. Not to mention that you're probably tying up all the money you're going to invest for ~5 years until (if you're lucky) there's an exit. Again, this is purely just my own (admittedly conservative) risk tolerance.

joshu 16y ago

First start taking some meetings. Unsolicited pitches in my experience are less investable. Do some advisory work or something like that. There is no accreditation process - you just are allowed once you meet the rules. Please understand, though, that if you have a $1m net worth, you probably can't allocate more than 10% of that to angel investing, which means being in just a few deals if your minimum in is $25k or whatever. And it comes back to you slowly - I've been investing since 2006, in 38 deals so far, and I've seen exactly one exit so far.