How can startup founders afford to become angel investors?
I'm seeing a lot of startups raise money from angel investors - where the angel investors themselves are newer startup founders with companies < 2 years old.
Are these people just funneling money? My understanding is that if you take VC money your goal is to devote the entirety of that amount to make your company into a success. But that doesn't seem right because so many failed entrepreneurs are writing angel checks.
Angel investments are small - 10s to low 100s thousands. If the founders were software engineers, they should be able to cover the investments from their savings. And if they got salary from the startup they founded, it's theirs to use however they see fit. They can also trade their stock or take loans using it as collateral. VCs usually participate in approving founder compensation, so I don't see it as funneling.
They’re not writing big checks. I have a self-directed IRA, for example, with about 100k in it. Not a heck of a lot of money, but my paper wealth in the form of founder’s shares of my last, still pre-IPO startup makes me an accredited investor, but self-dealing laws make me legally obligated to not use that money on my own ventures. So I can cut checks in the order of $5k - $20k, and do that 5-20 times before I run out. It’s fun, and I get investor updates from companies I really want to see succeed.