Diversification is a well-known principle for investors. To help round out a portfolio, accredited investors should consider the risks and rewards of angel investing. NM Angels allows investors to be part of the early stages of a company, investing in new products, new business models, and new services. While this type of investment comes with inherent risks, it also presents the potential for significant rewards.
Let us examine both sides in more detail:
The first main risk is failure. Not every company makes it. Target markets do not always adopt new ideas or products. In theory, many news articles make the risk of failure sound remote. But when it’s your money or your retirement, an investor has a different sense of proportion. According to Investopedia, the Angel Capital Association estimates that only 11% of angel investing ends with a profit.
The New Mexico State Legislature is aiming to mitigate investment risk and stimulate economic growth by extending the NM Angel Tax Credit through 2030. This initiative encourages investment in small businesses by offering angel investors a tax credit of 25% of their investment. The cap for the tax credit on each qualified investment is $62,500. To gain a thorough understanding, we encourage potential investors to visit the NM Angels website (New Mexico Angel Tax Credit – NM Angels) for detailed information on the New Mexico Angel Tax Credit.
Note that individual tax circumstances vary, and personalized tax guidance can significantly enhance the benefits of such incentives. We advise investors to consult with expert tax professionals, like those at REDW, who offer specialized tax and business services and whose goal is to maximize business profitability and returns on such investments (State and Local Tax – REDW Financial Advisors & CPAs).
Angel investing also comes with the risk of illiquidity; this means your investment is not easily converted to cash. Most investments in the stock market can be sold quickly, but angel investments often require patience, sometimes several years, before you can access your money.
Now we look at the rewards.
In the same study by the Angel Capital Association, the average return is 2.6x. When we look at 3.5 years, the expected Internal Rate of Return (IRR) is 27% per year.
Considering the S&P 500’s average annual return is 10.7% for the last 20 years, one can easily argue that angel investments adequately compensate for the risk. Two examples of companies that have been successes for NM Angels are Taos Bakes and Meow Wolf. Both firms received funding from NM Angels and NM Vintage Fund (a partner fund of NM Angels).
Angel investing also has a timing of returns component that can be very different from other investments. This difference in timing creates diversification, potentially reducing risk. By adding a small percentage of angel investments to your portfolio, you might lower overall risk.
Now, let’s look at the big picture rewards—there is more to angel investing than money. Investors have the opportunity to be mentors or contribute their expertise in many ways. Learning from active involvement provides an unparalleled experience that enriches an investor’s life beyond the financial.
Angel investing also nurtures a spirit of entrepreneurship in a local community. With it, small businesses drive growth and employment. Entrepreneurship moves beyond job creation, fueling vision, creativity, and community connection. New Mexico is a land of breathtaking beauty where people of diverse backgrounds come together to create an enriched blend of community. Angel investing is one powerful way that New Mexicans collaborate to create new companies where growth and opportunity are expanded for generations to come. In the Land of Enchantment, every accredited investor should consider if angel investing should be part of their portfolio.
© 2024 REDW Wealth LLC. This publication is intended for general informational purposes only and should not be construed as investment, financial, tax, or legal advice. Information and instruction shared in the article above do not guarantee outcomes, performance, or quality of services provided to REDW Wealth Management clients by REDW Wealth Management or its employees. Adherence to our fiduciary duty is not a guarantee of client satisfaction or any particular outcome. Advisory, Assurance, and Tax is offered through REDW LLC. Wealth Management is offered through REDW Wealth LLC.
