How to Generate Deal Flow as an Angel Investor

Part of Our Research Series for Angel Investors

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More opportunities means more investments means more money, right? Not necessarily. It is important for Angels to be able to differentiate between quality and poor investment opportunities, known as deal flow. Successful investors build processes to efficiently screen out low quality deals, and the majority of this work is done before deals even come their way.

Why Thinking Upstream Matters

Building a high quality deal flow pipeline starts at the beginning: the sources of these deals from an Angel’s personal network. This is where the benefits for Angels groups and syndicates come in as well. For now, we’re going to focus on building a personal pipeline and outline the resources available to Angel Investors to develop robust deal flow.

The most common sources of deal flow have generally been:

• Friends and Family
• Business Associates
• Entrepreneurs and Founders
• Professional Networks and Syndicates

Identifying the optimal sources of investment opportunities is the first step to establishing a strong deal flow pipeline. Specific examples within these areas may include:

• Investor Events and Forums: Local or online events such as startup showcases, demo days, speaker events, and educational investor forums. These may also include matching services or events held by larger institutional investors, corporate venture capital groups, and accelerators.
• Professional Angel or Accredited Investor Directories: Many Angel Groups are formed due to a geographic location or affiliation with a university. These groups often maintain online directories that contain resources with specific areas of opportunity to source deals.
• Venture Firms and Banks: Venture capital firms may pass on opportunities that do not fit their strategic philosophy, and Angels who are connected to partners at those firms may be able to leverage those passed deals into opportunities. Similarly, banks who offer debt financing to startups have strong relationships with these companies, who may be looking for equity financing. Both of these represent excellent channels to develop as an Angel investor.
• Universities, Accelerators, and Incubators: Each of these institutions connect with founders in an attempt to grow a company — and are always looking for investment partners to fund potential founders. Keep a lookout for newsletters and announcements around partnerships, business plan competitions, or demo days.
• Professional Associates: Accounts, lawyers, advisors and other professionals that play a key role in developing and assisting founders are an obvious resource for Angels looking for potential investment opportunities.

Once these have been established, the next step is to develop investment opportunity guidelines that outline specific preferences in order to understand potential fit.

Develop a Preference Sheet

Building a preference sheet is an easy way to wade through the incoming deal flow and determine which should be pursued for further review. The below represents one set of criteria an Angel can use, but of course can be changed as needed:

Other considerations include compensation (Angels who are very active in early stage companies may require compensation if acting as a director or executive), geography, and estimated market size, among many other factors.

AMA: Angel Mandate Agreement

The last step to developing a strong dealflow pipeline is to have a set of objectives when it comes to portfolio returns. While the success or failure can only be realized after the fact, developing a set of investment objectives creates a professionalized approach to creating an Angel Investment portfolio.

Here are some guidelines to establishing what we call an Angel Mandate Agreement, which outlines the expected portfolio outcomes:

• Return Objective: Target a 25% minimum realized cash on cash exit return across the entire portfolio.
• Risk Objective: Realize a total loss as a percentage of invested capital of less than 30%.
• Time Objective: Expected average time to exit of 5–7 years per investment.

Of course, as previously stated, none of these objectives can be realized when making the investment, but these objectives can be used to benchmark performance to date. If these objectives are not being met, a hard assessment of the entire investing process needs to be undertaken to uncover where the areas of fault lie. Is it in the quality of the deal flow, the diligence process, or the Angel’s involvement?

Generating this feedback cycle is critical to becoming a successful investor — just as most Angel investors have learned given their likely past success in their careers or other ventures.

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