The Essentials of Becoming an Angel Investor

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The Essentials of Becoming an Angel Investor

September 16, 2025

Risk, vision, and passion are all hallmarks of angel investors. More than capital, they bring experience, grit, and a strong sense of purpose to the startups they support. This article sheds light on the essentials of becoming an angel investor.

Angel investors: the first believers

Angel investors are accredited investors1 who make direct investments in early-stage companies in exchange for equity, debt, or other ownership terms. They are influential stakeholders because:

1. Angel investors fund startups at the riskiest stage: after friends and family, and before venture capitalists. Angel investors bridge the “valley of death,”2 a critical phase of the J-curve where many startups run out of funding.

J-curve graph

Source: Adapted from: Townsend, David M., and Lowell W. Busenitz. “Resource Complementarities, Trade-offs, and Undercapitalization in Technology-Based Ventures: An Empirical Analysis (Summary).” Frontiers of Entrepreneurship Research, vol. 29, no. 1, issue 5 (2009). https://papers. ssrn.com/sol3/Delivery.cfm?abstractid=1420903

2. Second, they bring their own experience and commit their time to help the company navigate early-stage and expansion growth phases.

To guide founders, Mark Lawrence, CFA, MBA, P.Eng., Executive Chair of Angel Investors Ontario, draws on his engineering and finance background, leveraging skills such as mastery of new technologies, critical thinking, problem-solving, and crafting clear narratives.

Sandy Robertson, founder of the Georgian Angel Network and an avid cyclist, applies persistence to both sports and angel investing.

“Cycling gets harder on uphill climbs. I focus on the next pedal stroke and keep climbing. I persist,” he says. Angel investors embody the traits of trailblazers: exceptional risk tolerance, vision, resilience, and discipline.

Why become an angel investor?

While financial returns can be compelling, angels are primarily motivated by impact, engagement, and intellectual curiosity.

First, angel investors take pride in contributing to the country’s economic prosperity. Supporting startups fuels innovation, job creation, and long-term economic growth.

Second, mentorship is a powerful way to give back to the community. Lawrence finds the greatest satisfaction in working with coachable founders willing to build a team with individuals smarter than themselves, and in witnessing their startups grow.

Third, it offers exposure to emerging innovations, alongside the opportunity to collaborate with peers and access investment opportunities.

Finally, when strategically navigated, angel investing offers portfolio diversification and exceptional returns, with a historical average internal rate of return (IRR) of 27 percent. ³

How to become an angel investor?

Several ecosystems facilitate access to early-stage investment opportunities:

• Angel groups bring together accredited investors who pool capital and expertise to invest in early-stage companies. A screening committee usually reviews startup applications, ensuring only the most promising opportunities reach members. Thus, investors can save time, network, and learn.

• Accelerators are selective programs that provide startups with intensive mentorship and operational support. Alumni of these programs tend to be more fundable.

• Incubators are programs that provide nascent startups with mentorship, connections, and resources to support their early development.

• Other channels: University entrepreneurial programs, startup conferences, online funding platforms, personal, or professional networks can offer opportunities to connect with startups.

Risks and challenges

Financial risk

Angel investing carries a high risk of capital loss. According to National Angel Capital Organization (NACO) Canada, just one in ten investments generates 90 percent of total return. Robertson explains: “Out of ten companies, one succeeds, seven fail, and two become zombies.”⁴

Despite these odds, risks can be mitigated by investing in sectors where you have domain expertise, joining angel groups, and constructing a well-diversified portfolio.

Illiquidity and dilution risks

Angel investments typically take several years to yield returns or exit. Investors must therefore adopt a long-term horizon. Additionally, future funding rounds often lead to dilution, reducing both ownership and influence. Reserving capital for follow-on rounds helps mitigate this risk.

Human dynamics

With trust and relationships at the heart of angel investing, emotional intelligence is paramount. Robertson puts it clearly, “If I don’t like you as a human being, I will not invest in your company, regardless of your intelligence or your product.” For Lawrence, the most challenging situations involve founders unwilling to step aside when they are no

longer the best fit. “Success can be achieved by the whole team, not just the CEO,” says Lawrence.

Angel investors embody the traits of trailblazers: exceptional

risk tolerance, vision, resilience, and discipline

Facilitation

Before seeking deal flows, angel investors should adopt resilience, patience, and discipline as guiding principles. Robertson says to new investors, “You need to be willing to lose all your money and not see it as failure, but as a lesson.” Lawrence adds, “Take your time to do thorough due diligence before investing. Listen to people with sector expertise, but educate yourself; don’t blindly follow others.”

Portfolio construction

A thoughtful allocation strategy is essential from the start. Given its high-risk nature, angel investing should represent at most 10 to 15 percent of your total portfolio, according to NACO.

Diversification matters

Investing in at least 20 companies is a common practice to benefit from the “law of large numbers.” However, it is not enough; spreading investments across different maturity stages is also crucial to mitigate risk. Early-stage startups offer high return potential but carry higher failure risks, so including later-stage private companies helps balance overall portfolio risk.

Staged investment

Lawrence advises, “When you see a good opportunity, divide your allocated funds into three parts: for today, in a year, and in two years.” This approach can mitigate risk and support startups through key milestones, aligning investment timing with company growth.

Power of due diligence

NACO reports that angel investors who spend 20 hours on due diligence achieve an average return on investment (ROI) of 2.6x, while those spending 40 to 60 hours reach nearly 5.9x. This highlights the importance of a thorough evaluation.

Due diligence starts with the founder. Angel investors are, above all, investing in that person. They seek a unique combination of character traits, operational competence, and domain knowledge.

For Lawrence, coachability is undoubtedly the most important quality of a founder. He says, “Surround yourself with people more intelligent than you.” Robertson echoes this sentiment: “Founders need to know what they don’t know.” Lawrence, who reviews nearly 300 founders’ presentations monthly in the initial funnel, adds that he ensures the founder is continuously up to date on their market.

It is also critical to assess the team: Do members share a common vision? Do they collectively bring the right mix of skills, experience, and qualifications to succeed? Is communication consistent across the team? Is there mutual trust?

Other due diligence areas such as governance, financials, product or service, and legal structure require close attention. These are summarized Figure 2.

Date September 16, 2025

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