Start an angel investment firm by following these 9 steps:
You have found the perfect business idea, and now you are ready to take the next step. There is more to starting a business than just registering it with the state. 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.
Check out our How to Start a Business page.
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 are the startup and ongoing costs?
- Who is your target market?
- How much can you charge customers?
- What will you name your business?
Luckily we have done a lot of this research for you.
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.
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.
STEP 2: Form a legal entity
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.
Form Your LLC
Read our Guide to Form Your Own LLC
Recommended: You will need to elect a registered agent for your LLC. LLC formation packages usually include a free year of registered agent services. You can choose to hire a registered agent or act as your own.
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!
You can acquire your EIN for free through the IRS website, via fax, or by mail. If you would like to learn more about EINs and how they can benefit your LLC, read our article, What is an EIN?.
Small Business Taxes
Depending on which business structure you choose, you might have different options for how your business will be taxed. For example, some LLCs could benefit from being taxed as an S corporation (S corp).
You can learn more about small business taxes in these guides:
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.
Additionally, learning how to build business credit can help you get credit cards and other financing in your business's name (instead of yours), better interest rates, higher lines of credit, and more.
Open a business bank account
- This separates your personal assets from your company's assets, which is necessary for personal asset protection.
- It also makes accounting and tax filing easier.
Recommended: Read our Best Banks for Small Business review to find the best national bank, credit union, business-loan friendly banks, one with many brick-and-mortar locations, and more.
Get a business credit card
- This helps you separate personal and business expenses by putting your business' expenses all in one place.
- It also builds your company's credit history, which can be useful to raise money and investment 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.
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.
Learn more about General Liability Insurance.
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.
STEP 8: Define your brand
Your brand is what your company stands for, as well as how your business is perceived by the public. A strong brand will help your business stand out from competitors.
If you aren't feeling confident about designing your small business logo, then check out our Design Guides for Beginners, we'll give you helpful tips and advice for creating the best unique logo for your business.
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How to promote & market an angel investment firm
Unlike most businesses, angel investment firms typically don’t have to actively market their services – businesses tend to come to the firms, not the other way around. However, there are organizations like the Angel Capital Association (ACA) that you can join to connect you with other angel investors and potential investment opportunities. The ACA has over 14,000 angel investor members and is the largest organization of its kind in the world.
How to keep customers coming back
Your angel investment firm is not going to have to worry about attracting potential investments. If you are capable of investing hundreds of thousands of dollars into startups and willing to do so, you will never be lacking applicants. The main thing you have to focus on is making the best investments you can so that your firm stays afloat and ideally earns a significant profit.
STEP 9: Create your business website
After defining your brand and creating your logo the next step is to create a website for your business.
While creating a website is an essential step, some may fear that it’s out of their reach because they don’t have any website-building experience. While this may have been a reasonable fear back in 2015, web technology has seen huge advancements in the past few years that makes the lives of small business owners much simpler.
Here are the main reasons why you shouldn’t delay building your website:
- All legitimate businesses have websites - full stop. The size or industry of your business does not matter when it comes to getting your business online.
- Social media accounts like Facebook pages or LinkedIn business profiles are not a replacement for a business website that you own.
- Website builder tools like the GoDaddy Website Builder have made creating a basic website extremely simple. You don’t need to hire a web developer or designer to create a website that you can be proud of.
Using our website building guides, the process will be simple and painless and shouldn’t take you any longer than 2-3 hours to complete.
Start An Angel investment Firm In Your State
Select your state below for an in-depth guide on completing each of these steps in your home state.
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.
Want to know if you are cut out to be an entrepreneur?
Take our Entrepreneurship Quiz to find out!
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.
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Take the Next Step
Find a business mentor
One of the greatest resources an entrepreneur can have is quality mentorship. As you start planning your business, connect with a free business resource near you to get the help you need.
Having a support network in place to turn to during tough times is a major factor of success for new business owners.
Resources to Help Women in Business
There are many resources out there specifically for women entrepreneurs. We’ve gathered necessary and useful information to help you succeed both professionally and personally:
If you’re a woman looking for some guidance in entrepreneurship, check out this great new series Women in Business created by the women of our partner Startup Savant.
What are some insider tips for jump starting an angel investment firm?
Make sure you have enough capital to get sufficient returns on your investments and know your market inside and out. Your firm can only make a profit if you get a large enough stake in the companies you are investing in. And, the bigger you can go with your investments, the more likely you are to be able to exercise some control over the actions of the companies you invest in – which allows you to steer them towards success based on your industry knowledge. It’s particularly important to know the market you are investing in because angel investments are quite risky. Market knowledge will help cushion you against some of that risk.
How and when to build a team
While some private individuals do angel investing all on their own, more often angel investors are a collection of people and/or organizations that come together to invest. Unless you have substantial financial resources, you will most likely need to build a team from the outset. Look for other investors who are equally passionate about the industries you are passionate about and who have the finances to contribute to your efforts. You will also need staff to handle the logistics of your organization, including communications, research, and funding.