You are an angel!

Unlike VCs in Silicon Valley that, because of the nature of their business (to attract and invest in most promising innovations), they establish brand awareness, most Angel Investors are not really visible, hence angel investments being less tangible for startups. When chatting with especially first time entrepreneurs, oftentimes one gets the impression many have a rather naive understanding of who those “Angel Investors” actually are and how they make their decisions.

It was a Thursday afternoon in early 2011, when, with a friend of mine, I entered the Prudential Tower in Boston. We were introduced to a late stage investor, and while preparing for the meeting I was very skeptical to actually take the meeting, as my startup back then had initial traction — but it was never ever a business case for late stage investment. I always do respect everybody’s time a lot as I appreciate others doing the same — and because based on online researches I didn’t see a common business denominator — I was about to cancel the meeting when I thought to give it a try and just ask for advice — rather than pitching our seed round we were raising. I ended up meeting one of the most pleasant people with whom we shared personal interests, had a great conversation and … who ended up investing privately in the startup “because he believed in me”. How great is that … (!!) … exciting stuff!

Another case with a great lesson was when I was introduced to a non-tech non-us entrepreneur (which, translated, means somebody who is not into startup things with a conservative mindset) who had recently had an exit. Same thing as the case before; nothing actually based on the research indicated them to be a potential Angel Investor match. Within the first 2 calls, this person verbally committed to participate and joined the round within the month.

2 startups and a couple million dollars raised later, some lessons learned I would have appreciated knowing earlier.

Who are those Angel Investors?

Look around! How many people do you have around you right now? Yep, everybody surrounding you can be one. Whomever falls in love with the purpose of what you are doing (the WHY, not the WHAT) — is a potential Angel Investor of your venture! In order to get there — your story must enchant and the listener must feel touched by something within your business opportunity.

Maturing their understanding on angel investments makes it easier for entrepreneurs to a) filter them b) understand how they work and c) prepare for which button to push to trigger their attention.

If you go by the “book” a.k.a. generally speaking, Angel Investors need to meet the Securities Exchange Commission’s (SEC) definition of accredited investors. They each need to have a net worth of at least $1 million and make $200,000 a year (or $300,000 a year jointly with a spouse). Their deal flow comes from personal relationships built over years with entrepreneurs, other Angel Investors and venture capitalists. But this all applies for those Angel Investors who see angel investment as their business. In reality, many early stage investments are done by people who don’t see themselves as professional “Angel Investors”- and hence don’t position themselves as such.

How did they make their money?

Understanding how people who might potentially be considered to join your early venture made their wealth gives entrepreneurs not only a path on where to meet them — but helps one get an understanding of the investment mindset. I used to break down Angel Investors into four different types.

THE UPPER MANAGEMENT

Golf clubs, beautiful cars and startup venture investments — these are great topics that make a cigar and bourbon after-work chat interesting. VPs and CxOs, working at usually larger corporations that make easily at least a bigger six figure salary, tend to be more open to diversifying their investment portfolio by adding startups to their portfolio. “Upper Management” Angel Investors are of great value, especially when corporate influence, structure and politics are key to the startup business.

RIGHT TIME RIGHT PLACE PEOPLE

Especially frequent in Silicon Valley are Angel Investors that were with startups when things started flying through the roof without them putting in sweat equity or taking any other entrepreneurial risks … aka many at Facebook, Google, Palantir … where even employee number 100 made a couple million dollars. A great advantage for startups winning such an Angel Investor is to get a subject-matter-expert with a great CV.

SUCCESSFUL ENTREPRENEURS

Angel Investors that have been on both sides of the table — as a tech founder and as an investor — are those from whom an upcoming startup can benefit, especially from their operational experiences. It’s a great value add knowing you can rely on know-how phase by phase. Because they experienced themselves how challenging it is to move a company from scratch through the various ups and downs, they usually tend to invest in other tech companies as they know the market.

ANGEL GROUPS

Full time investors that have specialized in investing in early stage startups, that join rounds either as part of a fund or own money. Can be as sophisticated as Y-Combinator and 500 startups, or smaller groups that host regular demo events. While the check size can be bigger, the fundraising part implies a more thorough due diligence as the three other investor types mentioned above. In other words — if your traction is weak the probability of getting funded via angel groups is also poor.

How do Angels invest?

A deal is of course primarily driven by an economic purpose, but what leads to it — especially for early stage tech investments — goes BEYOND measurable ROI goals.

FIRST THINGS FIRST

Entrepreneurs expect investors to put their “venture” money into a deal stage that is often way too early. Entrepreneurs that understand that an investor’s main activity before betting on the new venture is to “mitigate investment risks” — are those who are more likely to get funded. Hence, before trying to get any Angel Investor’s attention, make sure you have tangible substance (not an idea on paper) behind the following key areas that are expected for early stage tech startups

• How committed is the team & what experiences underline the execution capabilities?
• Quantify customer discovery feedbacks and emphasize what validates the product-market-fit assumption.
• Prove unique distribution strengths and / or activities.
• What’s the barrier of entry for any other organization?

INTRINSIC MOTIVATIONS

But at the end of the day, regardless of how much an Angel Investor tries to pre-screen a deal, there are so many factors that happen along the way that nobody can say with certainty what is going to happen. It is important for entrepreneurs to take into further consideration the intrinsic decisions … things a person decides based on values from within

EMPATHY a) How much is the Angel Investor sympathizing with the purpose of the startup? The why you are doing what you are doing — not the what! This is KEY — otherwise if there are no emotions to it from an investor — than the probability of getting a check is lower. b) How sexy is the founders’ story of getting where they got? In many cases — either one is a fighter and comes from nowhere to something, or one is a rock star already, which projects the future to be equally as exciting. To what category do you belong?

VALUE ADD “Because what you are doing is close to what I’ve been doing, if I invest my money into your venture, I can lower the risk of a potential failure — by me helping you navigate through pitfalls I went through.” This is where an investor starts not only sympathizing because he/she understand what you are doing, but also because of the outlook to get money back.

Usually subject-matter-experts or industry experts are great.

PRESTIGE The fear of missing out (FOMO) on a deal that might become the next big thing — is a situation that no person involved in the startup ecosystem doesn’t want to get into. The challenge is of course to have the right sense and gut feeling for which deal might be the case. This FOMO is usually leveraged when two situations occur: 1) in case of extraordinary traction that a startup accomplishes within a short period of time, considering weak resources or 2) when a crowd of Angel Investors starts committing to a deal which is reaching oversubscription … that is in such a demand — nobody wants to miss that hype.

Be passionate about making people fall in love with things you work on — Tommaso db

METHODS

With the age of crowdsourcing, angel investors share their risks by joining investment rounds led by “popular” Angel Investors. This activity — also known as “syndicates” — allows a group or also individuals to write smaller checks — while increasing the probability of betting on the right venture. Platforms such as AngelLists makes it easy not only for angel investors to filter thousands of startups — but also to run the syndicates through it.

It’s literally a win-win-win situation for all parties

• Investors get access to a lead’s investments and benefit from her experience in picking and managing investments. Investors can also invest as little as $1K.
• Leads get carry for their investments. They can invest 5–10x their typical investment amount, which gives them access to more deals and allows them to lead more deals. They may also get major investor rights. Finally, leads get access to syndicate investors who are often experts in the startup’s market.
• Startups get more capital with fewer meetings. They get the attention of a lead who is making a large investment. They get access to the syndicate investors’ networks without putting each one on the cap table. And they can easily collect many small investments.

From whom to get the fastest deal?

One rule of thumb applies: that those Angel Investors who feel at home in the industry startup is in / the problem the startup is solving, the higher the probability the angel investor has of being hooked.

The less you have accomplished — the more frogs you have to kiss … the harder you have to sell the vision and the outstanding team — while expecting smaller checks. The bigger the round — the more “traction” Angel Investors want to see.

Read also my related post: “How to raise dollars before having a MVP”

TAKEAWAY

• Everybody who is enchanted with the purpose of your business is a potential angel investor
• Angel Investment is a lot about the founder’s strength in conveying the vision
• Knowing how Angels made their money helps you to set the right expectations
• ROI is only the rational side of the story of why investors diversify their portfolio
• Syndicates leverage a group of Angel Investors

Click the share button below and make this information available to your network too! Follow my Blog “What it takes” . YOU ARE AWESOME!

Originally published at whatittak.es.