How should you qualify your potential angel investors? Because due diligence goes both ways.
AirTree Ventures compiled a list of Australian investors into a spreadsheet, #kudos. There are around 200 angel investors on the list as of writing (May 2017). I am here to help you qualify your potential angel investors.
The context here is you are raising your first $500k “non-family-and-friend” round for your tech startup. You should find the answers to the following questions before, during and/or after the coffee meeting.
Some digging around before reaching out
#1. What have they invested in?
Find out what the angel investors have invested in. Find their profile on LinkedIn, CrunchBase or AngelList. This will give you a sense of their industry focus.
Is this a “spray and pray” investor or a #fintech only investor? Have they invested in a #saas or a #marketplace business before? Will they get your space and business model?
#2. Are they active?
If their last investment was made in 1999, then they may have been wiped out in the year 2000 dot com crash.
Try to find out when their last 3 investments were made, this will give you a sense of their investment pace (1 deal a year or 10 deals a year). Try to find out if this is someone who is super hard to close or someone who has limited time to give you extra love.
#3. Do they believe in long distance relationships?
Some angels only invest in startups near them, because it is easier to hang out with the founders, and introduce people in their network to help on certain things.
I rarely invest in startups based in Gundagai for example, because if they stop sending me investor updates, it would be a long drive from Sydney to hunt them down.
#4. Do they have any current or previous director role?
If yes, then pay extra attention. There is usually a non-executive director seat available to the lead investor of an investment round (board observer for co-lead). Angel investors who can lead a round are super valuable, talk to them first. Close them and you may be half way there.
If they have a “GAICD” title (or equivalent) then this is getting serious, it means that they have completed an expensive course to do this board thing right, #jackpot.
#5. Do they have recommendations from founders?
Don’t trust those blindly, use it as a reference. The founders just took money from the investors so of course they are going to say good things right?
Call the founders in the investor’s portfolio who didn’t write a LinkedIn (or AngelList) recommendation for a juicier reference, *wink.
#6. Do they have recommendations from reputable VCs?
This is important because your next round will likely be led by a VC fund. If VCs trust this angel then the intro will be very warm when you start your next fundraising effort.
During the coffee meeting
So you send your pitch deck and ask for a coffee, maybe some Q&A will happen before they agree to meet you. Qualify them by asking the following questions.
#1. What is your typical investment amount?
If you are raising $500k and you raise from investors writing $10k cheques, you will need 50 of them and you will hit the disclosure threshold. The nightmare begins because you will need to chase up 50 people who are constantly on vacation (because they are rich) when it is “signature time”.
Epic #fml moment, trust me. Don’t do it. Get a few $100k, and a few $25k, and a few $10k to make up $500k ideally.
#2. What stages do you typically invest in?
Are you a pre-product, post-launch, pre-revenue investor or do you need to see $5k revenue per month?
If the investor says “too early for me”, you should ask “at what stage or revenue level should we ping you again?” and add the answer to your spreadsheet or CRM.
#3. Do you lead, follow or both?
As mentioned above, some angels can lead a round. They don’t necessarily write the biggest cheques but they can help you with the “data room”, set investment terms, work out the financials forecast/budget and make other investors comfortable.
Some investors are passive, or they only follow. Prioritise.
#4. Do you follow-on? What is your follow-on strategy?
Some investors invest a small amount in your first round and track you for a bit. If you deliver your promises, they may invest a bigger amount in your next financing round.
If they have the capacity to follow-on, then you have already raised part of the second round in one go.
#5. Are you a value-add investor? Can you give me an example? Can you intro me to a founder so I can get a reference?
If you are a hot startup with crazy good traction, you can obviously be picky. Some values include: securing a distribution partner for you, helping you close more customers, introducing you to a superstar employee and connecting you to later stage investors.
If your traction is still mediocre, maybe don’t ask this question.
After the coffee
How do you find the interaction with this particular investor? Do you think they get what you are doing? Do you think you can work with this person for the next 3–5 year? Answer any pending questions from above.
Start a spreadsheet, define a funnel and share it with your co-founder. Track the progress with each investor. I recommend something like this: “Outreach > pitch deck > coffee > q&a (remember to ask about their cheque size) > diligence > term sheet > money in the bank”.
That’s it, hope this helps.
Note 1: Learn more about managing the fundraising process by Duncan Anderson from Edrolo.
Note 2: Learn how Marc Cowper from Recomazing raised $1 million.
Note 3: here’s a list for US VC and their preference.