What is angel investing?

Angel investing is when a person invests capital (generally cash) into a startup. This capital is usually in exchange for equity. 

Angel investing normally takes place in earlier rounds of funding for startups, when other traditional capital sources are not yet available. This means it is usually a longer-term investment with fairly high risk compared to other investment asset classes. 

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Traditional barriers

A historic challenge to angel investing has been a handful of barriers to entry and the perception that it is unattainable for most individuals. These barriers can be both real and perceived. 

Let's face those barriers head on.

• Capital and financial constraints: Most angel investments require investors to be accredited. By design, this limits who can participate. Check out more about accredited investor requirements here. 
• Lack of specialized education and/or knowledge: Angel investors are at the cutting edge of new technology, markets, and innovations. It’s impossible to be an expert in everything, which can be overwhelming. The best way to approach this is to connect yourself with trusted subject matter experts. 
• No single source of consolidated resources: Angel investing is a skillset that can be developed and fine-tuned over time. Yet many resources to support angel investors are behind paywalls, require digging around the internet, or slant heavily toward what is happening in Silicon Valley. We are working to change that with Angel Basecamp!
• Time constraints: Finding startups, screening them, conducting due diligence, and negotiating deal terms can be incredibly time-consuming. The good news is there are angel networks and syndicates that help share the load.
• Investment complexities: It is likely you have gone your entire career without encountering the lexicon and concepts that are part of angel investing. Connecting to an angel network can be one of the quickest ways to learn. 
• Too risky: It is true, angel investing is risky and may not be for everyone. Angels should understand the long-term investment horizon (5-10 years), the illiquid nature of the investment (you can’t sell this investment on a secondary market), and overall risk profile (startups fail). You should ask yourself whether taking a high risk on a small piece of your investment portfolio aligns with your goals and interest. 

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Evolving demographics

Traditionally, angel investing has been reserved for older, and whiter, men. But the demographics of angels are changing. The field is trending younger, is no longer exclusive to mega wealthy individuals, and more women and Black/Brown investors are participating.

Also, interestingly, the professional backgrounds of angel investors have broadened. Of course, there are still the tech entrepreneurs, but they are now joined by doctors, pilots, professors, real estate developers, etc. who are now investing as angels. 

Drivers of this new change in investor demographics, include: 

• Alternative investments becoming more mainstream
• Regulatory changes including the SEC expanding the definition of “accredited investor” in 2020 to include professional certifications, designations and other credentials 
• A person can now qualify based on more than just income and net worth. This is the first time the definition has been updated in 35 years.
• Impact Investing and ESG (Environmental, Social and Governance) platforms encouraging individuals to be informed on where they are invested and better align their portfolios to personal values
• General demographic and cultural changes in Minnesota 

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Investor motivations

People decide to get into angel investing for a variety of reasons, ranging from staying sharp after retirement to diversifying their investment portfolio. 

Check any that apply to you:

• Desire to have deeper and more specific impact with your money/investing 
• Interest in investing locally, and seeing fruits of those investments within your community
• Goal to deploy a specific investment thesis (e.g. Investing in female and/or Black, Indigenous or People of Color (BIPOC) founders; backing companies that address climate change, investing in Minnesota based startups, etc.)
• Aspire to mentor and share your expertise with others (founders and other angels) 
• Desire to diversify your investments beyond traditional asset classes 
• Crave connection to other changemakers 
• Goal to create generational wealth (or catch up on missed opportunities to amass wealth)

If you’ve marked yes to any of the above, angel investing may be a fit for you.  

While monetary gains may not always be a primary motivation, we consider it to be a prerequisite to keeping angels. 

In Minnesota, Groove Capital has found consistent motivations expressed by angels, regardless of their background. They shared their findings in a Twin Cities Business Magazine article: Building Minnesota’s Angel Movement.  

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Industry sector highlights 

Minnesota has what some call a headquarters economy, with over 57 companies bringing in over $1 billion a year in revenue, including Target, 3M, Cargill, and Mayo Clinic. The main corporate industries in the state include areas like consumer packaged goods (CPGs) and food technology, digital health and medical devices, and financial technology; coincidentally, the most popular verticals that receive investments include medical devices, software, and financial technology.

When looking at data from Minnesota’s Angel Tax Credit program, startups in the medical device and equipment industry, as well as software received the most investments .  However, the third largest category is food and drink; local distillery Brother Justus Whiskey Company received an investment of just over $1 million with help from the program. 

Innovation isn’t limited to those traditional sectors. Minnesota boasts startups ranging from robotics, LegalTech, BioTech, Sports & Fitness, and beyond. By investing early, angel investors can change the scope of businesses in any industry, from retail to educational software.

The future is what you invest in.