If you’ve ever gone through the mental battle of trying to figure out where to invest your money, you’re not alone.
Typically, when everyday people think about investing, they automatically think about the stock market.
Some statistics estimate MILLIONS upon millions invest in stocks — and if they’re solely focused on those opportunities… they could be leaving money on the table.
You see, the number of angel investors in the U.S. is only in the hundreds of thousands.
Why such a disparity? The #1 reason is good ole’ lack of awareness.
The everyday person just doesn’t know that they can start angel investing with less money than you spend on dining out each week.
And then you have those who simply fear the unknown. And I get that… it’s human nature to be unsure of something new.
Both strategies of investment give you equity ownership in a company. In exchange for your capital ($$$), you’re given a ‘piece’ of the company. As the value of the company grows, so does your investment.
They will both test your fortitude as an investor and come with their own risks and potential upside. Let’s dive in and take a closer look.
Follower or Lone Wolf
As a stock investor, you’re following a herd mentality. Just turn on CNBC and you’ll see how much focus they give to the daily movement of stocks. It’s dizzying.
Nothing wrong with that–the stock market drives the global economy and plays an important part in the overall investment plan of hundreds of millions of people.
Angel investors are more like lone wolves. They make up a fraction of the total investing community.
But why? Lack of awareness and fear of the unknown are two big reasons. But then you have those who just flat-out don’t see the opportunity startup investing brings.
Angel investing is built on trust – cultivating relationships and networking, not being spoon-fed the latest trending from MarketWatch analysts.
They cut out the middleman and go directly to the entrepreneurs making waves of innovation and advancement… before Wall Street gets their business in a stranglehold.
It can be an incredibly lonely journey! That’s why finding a community on the same journey is a game-changer.
Let Your Voice Be Heard
You now know both angel investing and stock investing give you an equity share in a company. But that’s pretty much where the similarities end.
As a stock investor, based on the number of common shares you own, you can vote on major decisions at the company. It’s generally the “activist investors” who own about 6% or more of the shares whose voices are the loudest.
But who owns 6%+ of a stock they invest in?? Exactly my point. Your voice WON’T be heard as an everyday stock investor.
As an angel investor, it’s a completely different ballgame.
Say you invest between $500 and $5,000. Instead of just weighing in on major decisions, you’re helping the startup’s founders shape the direction of the company and make recommendations for handling bumps along the way. You’re there to celebrate the wins and get frequent updates from the team.
Have expertise in an area of need… or connections who can help with manufacturing? Chances are, the founders will welcome your help and ideas with open arms.
Returns & Liquidity Event
A common thread between angel investors and stock investors is they are both in it to generate returns. I mean, who doesn’t like making money?
For stocks, those returns could come by way of capital gains, dividend payments, or a combination of the two. When the time comes, as long as you are trading a stock that’s widely held, chances are you will be able to cash out of the investment rather quickly and without seeing too much of an impact on the price. If history is any indication, you can expect to earn annual returns of roughly 8-10%.
In summary… stocks are highly liquid (easy to cash in) and history shows them to provide a relatively predictable return over the long-run.
As an angel investor, it’s important that you focus on adding multiple startups to your portfolio and don’t get caught chasing the next “unicorn” (a startup with a value > $1B).
Hey – don’t just take MY word for it… Randall Reade, VP of ArchAngel investment group, says you’ll generate returns hand over fist and beat the stock market while you’re at it by following that advice.
“About our second or third year in, we reviewed the companies that our investors were putting their money into. We realized that they were getting exits within two to three years of their investment, and getting 5X to 7X as an ROI, sometimes much more.”
You’ve got to be patient though. Not every startup is going to be a rock star for you, which is why you’ll need to also pick some winners to offset any laggards you might be holding.
Once you invest your money, it’s locked in until the startup reaches a liquidity event (aka an exit). The exit could look like an acquisition by another company or an IPO into the publicly traded market, for instance.
The time it takes a startup to reach an exit can vary wildly. It really depends on the stage they are in when you invested… the industry they’re in… and the opportunities they are presented.
If that exit comes, that’s where you get to cash in. If it never comes, you lost your investment. That’s the risk that comes with investing, period.
In summary… investing in startups is a long-term play and is much less liquid than stocks. But when you are able to build a portfolio with the right startups, hitting just one or two could be all you need to change your life… for generations to come.
I’d love to hear about your journey with angel investing! Have you been investing for years? What might be holding you back from getting started? Tell me in the comments below!