How Much Does an Investor Make?

While entrepreneurs focus so much on securing funding from investors, we don't tend to look into investors themselves. What is the day-to-day? Where is the funding money coming from? And most interestingly, how much do they make?

An investor is someone who commits funds with the expectation of making it all (and more) back. They can commit funds to several different things, whether stocks, commodities, bonds, property, or in our case, a startup business.

What are the main types of investors?

In general, there are three types of investors. These are pre-investors, passive investors, and active investors.

Pre-Investors: This is what we call non-professional investors. So someone who invests in your business, however, they are not a career investor and do not actively look for opportunities. This tends to be people you know, family, and friends who believe in you and your idea and are willing to commit a small amount of capital to help you succeed.

Passive Investors: These are investors that do invest professionally. Likely, you did not know them before the investor-business relationship. The key trait that makes someone a passive investor is that they do not partake in any business activities.

Active Investors: These investors commit capital and take an active role in the business; they may make decisions on management, strategy, or other aspects of the company. These tend to be venture capitalists or private equity firms.

Let's talk more about Angel Investors:

Angel investors mainly invest in startups or early-stage businesses and usually have an exciting high-profile status before entering this world.

Angel Investors are accredited investors, and they must fulfill a few requirements before achieving accreditation. Financially it requires a minimum net worth of at least 1 million dollars or an annual income of at least 200,000 dollars. 

It may also be necessary to hold one of the following licenses:

• A brokers license

This is an additional license that real estate agents can gain. It allows them to own a real estate firm and hire other agents to work for them.

• An Investment advisor license

This license allows you to be the financial advisor to individual investors and manage assets. To gain this license you must first pass the Series 65 (Investment Adviser Law) exam.

• A private securities offering license

This allows you to solicit and sell private placements security products. You must first pass the Securities Industry Essentials Exam and the Series 82 exam.

Angel investors usually expect a cut of ownership in the company in return for their investment, and they tend to go for high-potential, high-growth startups that are worth the potential risks.

How does an investor make money?

When it comes to business investments, investors bank on the fact that the business will increase in value, and they will be able to profit from this. Unfortunately, that makes investing tricky; it is a considerable risk and can either mean a huge loss or a huge reward.

They do not seek a considerable amount of control over the company but rather enough equity to exit at a later stage with enough of a profit. This tends to be around 20-25% of a startup.

When an investor decides to end their relationship with a startup, it is "an exit." It just means that an investor has decided to move on and sell their part of the business. Possibly to another investor, a public member, or a private company. Generally, these are planned far in advance and can even be on the terms sheet between the investor and the business.

How do they get an exit?

There are a couple of main ways that an investor can get an exit and make back their money in a business. Below are a few…

Acquisitions

An acquisition is a very common exit for investors. It occurs when a larger company acquires a startup company in the same field. There are several reasons a larger company would do this, either for their resources and employees or to limit direct competition. The shareholder will then typically receive equity, cash, or both.

Buyback

This is when a company/ the founders buy back the shares from the investor. This could be for company consolidation, reducing shareholders, increasing equity value, etc.

Larger investors

As a company grows, more significant and wealthier investors may inevitably be interested in acquiring a part of the company. In general, you make more money if you have a larger share of the company, so many investors buy the shares off smaller investors and the shares on sale to have a more significant percentage. But, of course, the company board must approve before this can happen.

IPO (Initial Public Offering)

This is when a company goes public and allows members of the general public to buy shares. Even reaching this stage is a long process, and most startups will not get here. However, it provides excellent returns for investors, allowing them to sell their stock much more quickly.

Other Income Sources

There are a few other ways an investor can make a return on their investments.

Regular Dividends

While this isn't very common, sometimes a startup may reach the stage of no longer needing funding or investment. In these situations, the board may pay a regular amount to the investors as a return. But, again, this is usually agreed to and will be in the investor-business term sheet.

Employee Compensation

Occasionally a company will also make returns to an investor by giving them a role in the company, such as CEO, CFO, etc. But, of course, they will then be paid a salary like any other employee.

So how much does an investor make per year?

According to zippia.com, the average investor salary in the USA is 88,000 dollars, up to 200,000 dollars per year for top earners. However, this number, of course, has many different factors we should consider. 

This tends to be the salary for an employee investor who works for a firm that receives compensation (and usually commission) on stocks.

However, it is challenging for us to nail this number down for angel investors. So, to begin with, to be an angel investor, you must already be making at least 200,000 dollars per year even to receive accreditation.

As a general number, investors look for a return of around 27 percent per year on their investments. This makes it tricky to pin down the number they make per year. The actual return percent will vary, as will the amount they invested.

This is why investors are so careful about what startups they invest in; with startups having a 5-year survival rate of only 51.3%, investors will have to make enough money off of the successful ones to account for any losses they made on the failures.

Overview

While angel investing can be a very successful and lucrative career, it does come with several considerations. Before investing in any business, you should thoroughly check all its information, scaleability, the current market, etc. Talk to as many investment advisors as you can before committing any cash.

Despite the risk, thousands of business-minded individuals are still becoming angel investors every year. With the chances of extremely high returns, it can be a very tempting role to pursue.

Our blog has several articles on both being a startup founder and an investor, with general info, tips, and tricks to help you make the most of your investment journey.