How I Made My First Angel Investment and How You Can, Too

Start making investments in startups without being an accredited investor

Mar 7, 2022

It should go without saying that none of the below is financial advice. But in case you interpret it that way. It’s not financial advice.

I wouldn’t blame anyone entering the world of startup investing for the first time to be concerned by the gatekeeping that takes place. The central gatekeeper itself is the accredited investor requirement, where you have to be worth a lot of money or make a lot of money over two years. I don’t meet either of those, so how can I invest in startups?

The short answer is, I’m British. But the long answer crosses borders.

In the United Kingdom, you can be a ‘Restricted Investor’, when you invest no more than 10% of your net worth into ‘non-readily realiSable investments’. Investments that are difficult to price and can’t be quickly sold like stocks or bonds. Startups (and more) fall into this category. These investments must be in companies based in the UK or EEA countries. But after investing in two within two years, you can become a ‘self-certified sophisticated investor’. So I am sophisticated (according to myself). And now I can invest anywhere.

For my friends who write ‘-or’ instead of ‘-our’ or ‘oui/si/ja etc.’ instead of ‘yes’. How can you invest in startups without accreditation?

One way (and the more difficult way) is through a syndicate.

A syndicate is a group of people who collectively invest in a startup. The lead of the syndicate gets an allocation (some equity for an amount of money) in a startup. They then raise funds from angel investors to meet the allocation amount. You can be the syndicate lead. Being a lead takes a lot of time and hard work.

First, you need to find the right startup and get an allocation. Then, you have to find investors who *are* accredited to invest in the syndicate. And you have to do all of the back office work (managing the bank transfers, legal paperwork, etc.) to manage it.

The craziest part is you can’t invest yourself because you’re not accredited. So why bother?

It’s called ‘carry’. And it’s what’ll get you to Cabo.

Carry is a percentage of the return the syndicate lead takes before divvying the returns back to the syndicate investors. And the industry standard is 20%. You may consider taking a lower carry to attract investors if it’s your first time. Let’s say you hit a winner and the returns are $10,000,000. You take $2,000,000. And the remaining amount goes to the syndicate investors. That’s a hell of a lot of trips to Cabo.

There is another, less time-consuming, way.

A venture scout finds investment opportunities in startups and forwards them to somebody with capital (a person or a firm). Anyone can be a venture scout. Venture scouts often get a cut of the carry the investor takes in the referred company. Sahil Lavingia’s fund, shl.vc, gives scouts part of the carry for the *entire* portfolio, but this is uncommon.

The hard work you have to do to be a syndicate lead or venture scout is like an investment in yourself. You’ll reach out to founders, assess their companies, build a network and learn a shit tonne. And it’s not like you’re going to be seeing the financial returns for a while, that’s the nature of startup investing. You may as well get some short-term gain.

So, there are a few options you can take. First, you can be Bri’ish and invest in star’ups as a restricted investor. Or you can find founders, source startups and entice investors as a syndicate lead and/or venture scout, with one being more complicated than the other. For some of us, we can be all three :)

Below are resources to help you begin your adventure in startup investing.

Resources

Restric’ed investors look here - Familiarise yourselves with the FCA rulebook. And if you want to take the plunge, AngelList is the place to check out.

If you’re American, you can become accredited by passing the Series 65 exam. Andrew Rea has written about his experience taking the exam.

If you want to become a syndicate lead - Paige Finn Doherty published her essential guide to syndicates. Paige went from syndicate lead to a GP (we’ll be covering this and more terminology next week) at her venture firm. From there, you’ll want to look at setting up a syndicate through companies like Odin, Vauban or Assure.

And if scouting sounds more like your thing - On Deck Catalyst Scouts is an annual scouting program that trains you for a career in venture capital. They currently don’t offer carry, but you’ll learn a tonne and make lots of friends. Joining On Deck was one of the best decisions I’ve ever made. Alternatively, you could look at the man mentioned earlier, Sahil Lavingia’s fund, and apply to scout there. And here’s a directory of scout programs.

Not that I can speak from experience. Becoming a syndicate lead is something I plan to do in the next few months.

Companies like Odin, AngelList, Assure, and more can do all of this for you for a fee.