How to Start an Angel investment Firm

Start an angel investment firm by following these 10 steps:

1. Plan your Angel investment Firm
2. Form your Angel investment Firm into a Legal Entity
3. Register your Angel investment Firm for Taxes
4. Open a Business Bank Account & Credit Card
5. Set up Accounting for your Angel investment Firm
6. Get the Necessary Permits & Licenses for your Angel investment Firm
7. Get Angel investment Firm Insurance
8. Define your Angel investment Firm Brand
9. Create your Angel investment Firm Website
10. Set up your Business Phone System

We have put together this simple guide to starting your angel investment firm. These steps will ensure that your new business is well planned out, registered properly and legally compliant.

Exploring your options? Check out other small business ideas.

STEP 1: Plan your business

A clear plan is essential for success as an entrepreneur. It will help you map out the specifics of your business and discover some unknowns. A few important topics to consider are:

• What will you name your business?
• What are the startup and ongoing costs?
• Who is your target market?
• How much can you charge customers?

Luckily we have done a lot of this research for you.

What will you name your business?

Choosing the right name is very important. Read our detailed guide on how to name your business. We recommend checking if the business name you choose is available as a web domain and securing it early so no one else can take it.

What are the costs involved in opening an angel investment firm?

The main costs involved in starting an angel investment firm are finding capital for investing. You need a big enough pool to allow you to make investments with favorable terms. If you can only invest a small amount of money, then you are less likely to be given any significant stake in the company. Some angel investors recommend starting with at least $100,000, but preferably more like $500,000.

What are the ongoing expenses for an angel investment firm?

The ongoing expenses for an angel investment firm include operational expenses for the organization and investment expenses. Operational expenses can vary greatly depending on the size of your operation. The costs for running your firm out of your house are minimal, while the costs for renting a building and paying staff are much bigger. Investment expenses are mostly related to maintaining your investment fund. If you invest in one business and it drains half of your reserves, you will ideally want to replenish those reserves to be capable of making other investments that might come along.

Who is the target market?

The target market of angel investment firms is generally startups, businesses that need funding and may not be able to get all they need through traditional lenders. However, many angel investment firms will focus on one or a few specific industries instead of investing in all types of businesses. The most promising strategy for your angel investment firm will be to target a market that you are intimately familiar with.

How does an angel investment firm make money?

An angel investment firm makes money when the businesses it invests in make money. Here is a simplified example: If a firm invested $100,000 in a startup in exchange for a 25 percent stake, the firm would earn 25 percent of the profits of the startup. The startup may make no profit the first year, $100,000 in profit the second year, and $500,000 the third year. So, the first year the angel investment firm makes no money from the investment. The second year, it makes $25,000. In the third year, it makes $125,000.

How much can you charge customers?

An angel investment firm usually negotiates how much it will get paid on a case by case basis. Most businesses are going to come looking for angel investments with the goal of minimizing what they pay for those investments. The goal of your firm is to maximize your profit from each investment. If you have ever seen Shark Tank, you know how this works. They will come to you with an idea and offer you a set percentage of the business in exchange for a specific amount of money. You can accept the deal they offer, but you are more likely to negotiate as well for a bigger stake for less money.

To give you an idea of how much money you could make with the right deal, you can look at one of the most famous angel investments. Peter Theil gave $500,000 to Facebook when it was just starting. If he had held onto his stake in the company, it would now be worth $10 billion.

How much profit can an angel investment firm make?

Angel investment firms can make massive profits if their investments pay off. The example described above of the Facebook investment demonstrates this fact. While your firm may not be lucky enough to invest in the next Facebook and make billions, it could certainly generate millions of dollars in profits if you have enough money to invest and invest smartly. Luck plays a big part in this as well, as with most risky investing.

How can you make your business more profitable?

You can make your firm more profitable by investing in the right startups. That answer is pretty obvious, but it is the truth. If the startups you invest in make big profits, you will profit big as well. One other way you can make your firm more profitable is to start with as much investment capital as possible. You will get bigger payouts if you can invest larger sums – because you can demand a higher stake in each business.

STEP 2: Form a legal entity

The most common business structure types are the sole proprietorship, partnership, limited liability company (LLC), and corporation.

Establishing a legal business entity such as an LLC or corporation protects you from being held personally liable if your angel investment firm is sued.

You can form an LLC yourself and pay only the minimal state LLC costs or hire one of the Best LLC Services for a small, additional fee.

STEP 3: Register for taxes

You will need to register for a variety of state and federal taxes before you can open for business.

In order to register for taxes you will need to apply for an EIN. It's really easy and free!

There are specific state taxes that might apply to your business. Learn more about state sales tax and franchise taxes in our state sales tax guides.

STEP 4: Open a business bank account & credit card

Using dedicated business banking and credit accounts is essential for personal asset protection.

When your personal and business accounts are mixed, your personal assets (your home, car, and other valuables) are at risk in the event your business is sued. In business law, this is referred to as piercing your corporate veil.

Open a business bank account

Besides being a requirement when applying for business loans, opening a business bank account:

• Separates your personal assets from your company's assets, which is necessary for personal asset protection.
• Makes accounting and tax filing easier.

Get a business credit card

Getting a business credit card helps you:

• Separate personal and business expenses by putting your business' expenses all in one place.
• Build your company's credit history, which can be useful to raise money later on.

STEP 5: Set up business accounting

Recording your various expenses and sources of income is critical to understanding the financial performance of your business. Keeping accurate and detailed accounts also greatly simplifies your annual tax filing.

Make LLC accounting easy with our LLC Expenses Cheat Sheet.

STEP 6: Obtain necessary permits and licenses

Failure to acquire necessary permits and licenses can result in hefty fines, or even cause your business to be shut down.

STEP 7: Get business insurance

Just as with licenses and permits, your business needs insurance in order to operate safely and lawfully. Business Insurance protects your company’s financial wellbeing in the event of a covered loss.

There are several types of insurance policies created for different types of businesses with different risks. If you’re unsure of the types of risks that your business may face, begin with General Liability Insurance. This is the most common coverage that small businesses need, so it’s a great place to start for your business.

Another notable insurance policy that many businesses need is Workers’ Compensation Insurance. If your business will have employees, it’s a good chance that your state will require you to carry Workers' Compensation Coverage.

Is this Business Right For You?

This kind of business is right for someone who has a high tolerance for risk and sizeable funds. According to the data, approximately 50 percent of angel investments yield little if any returns. If you are going to get into this business, you need to have the personality and the financial resources to deal with the inevitable losses you will incur. It’s not all bad news, though. When you do win in angel investing, you can win big – enough that it more than makes up for your losses.

What happens during a typical day at an angel investment firm?

A typical day at an angel investment firm usually includes a lot of market research. Most angel investment firms focus on specific markets because investments are more likely to be successful if you are familiar with the market in which you are investing. Of course, market familiarity requires paying attention to what is happening in that market. And when these firms are seriously considering an investment, they will do deep research dives to ensure that they are as well prepared as possible before making a decision.

What are some skills and experiences that will help you build a successful angel investment firm?

Many angel investors are entrepreneurs with significant business experience. This experience is important because it helps them make informed decisions about the investments they make. Many successful angel investors are also experts in specific markets. For instance, a tech entrepreneur would be well-equipped to invest in tech startups. Business experience and market expertise are not required – anyone can become an investor if they have the money – but they will make it more likely that your firm will be a success.

What is the growth potential for an angel investment firm?

The growth potential for an angel investment firm is substantial. As of 2018, angel investors invest approximately $25 billion a year. That amount is expected to keep growing, indicating that angel investors are seeing enough positive returns to keep at it. While a new firm may take some time to start earning a profit, if it has enough capital to keep investing despite losses, eventually it could earn significant returns – which can then be turned around and invested again.