Is angel investing right for you?

So, you’re thinking about innovative ways of investing your hard-earned money. angel investing may be an option—but is it right for you? Angel investing involves the investment of cash into a start-up company by physicians or other professionals who have cash to spare.

Fill your retirement buckets first

“The angel investments are there for people who have funded all their other buckets,” says Anjali Jariwala, CPA, CFP^®, founder of FIT Advisors, in an exclusive interview with MDLinx. “They’re leaving enough money outside of retirement, and they still have cash left over and have an interest in this space. With angel investing, over 90% of start-ups fail. Someone who has an appetite for angel investing has to be aware of the risk and be comfortable with the investment possibly going to zero.”

As mentioned by Jariwala, the first bucket is the employer’s retirement plan—either a 401(k) or 403(b). The second bucket, which is available at some health-care institutions, is the employer’s tax-deferred compensation plan, or 457(b). The third bucket is the health savings account (HSA), which can be used to pay for current or future medical expenses that accompany retirement. On a related note, Jariwala also stresses the importance of setting aside money in an emergency fund to cover 3-6 months of living expenses.

Being an accredited investor

Angel investment opportunities are not available to everyone.

“To do an angel investment, you usually have to be an ‘accredited investor,’” explains Jariwala. “An accredited investor is one who has a net worth of at least $1 million—excluding the value of your primary residence—or has had an income of at least $200,000 each year for the past 2 years, or $300,000 for a married couple. This is a requirement set by the [US Security and Exchange Commission] that allows a person or entity to make an investment that may not be registered with a financial authority, such as an angel investment.”

What opportunities are available?

Angel investment opportunities run the gamut from telemedicine to specific diagnostic equipment. Although some angel investment opportunities are available online, such as crowdfunding, most physicians learn about angel investment opportunities through friends, colleagues, and angel-investment groups.

Angel-investment groups often consist of members from similar social or cultural groups who share a common interest and work together to vet potential opportunities.

“Unless you’re part of a group, or you have an inside track, it’s hard to get access to the deals,” says Jariwala. “Angel investing is just like any other investing: You want to have a lot of different options, and you’re not investing in the first thing that comes to your plate.”

What to invest in

The reality of angel investing is that, despite your most earnest attempts, it’s hard to pick winners.

“It’s really difficult to judge who the winners and losers are,” says Jariwala. “You can sit there and look through all the financial statements and know the management team and do all the diligence you want. Pick the investment that you have a passion for, that you’re interested in, or [in which] you really like the investor or management team and want to help them out.”

You want the management team to have a proven track record with successful angel investments and experience with the technology.

When being pitched an angel investment opportunity, Jariwala advises clients to clarify answers to the following questions: “What is the company’s goal, and what are the owners doing to reach it? Are they bringing something to the table that will help them propel this company to the next level?”

How much to invest

Most individual physician angel investors put in around $10,000 per opportunity. Larger groups of investors can pool their money as limited partnerships to buy into more expensive opportunities.

When angel investing, you want to invest in a start-up company as early as possible (ie, during the seed round) because when additional investors come on board in later funding rounds, your share or stock in the company becomes diluted.

Jariwala recommends that, as with other types of investments, diversity is key with angel investing. Consider placing money in five different opportunities, with the hope that one will pay out within the next few years.

She also suggests setting up a dedicated banking account for proceeds from your angel investment opportunities. The funds in this account can be reinvested in future opportunities.

On a final note, don’t forget that any proceeds from angel investments are taxed as capital gains. In other words, Uncle Sam will take a cut.