Section One – Angel Fundamentals
In this chapter, We will discuss the basic elements of angel investing. These topics are essential to help you decide if your interest is worth the effort. We have compiled a list of what we believe to be the core elements of angel investing.
Let’s start by defining angel investment. Angel investment is a form of venture capital that involves an individual or group of individuals investing money in a small, early-stage company or business.
There are no “formal” qualifications to be considered an “angel” outside of one’s own opinion. Many people define what an “angel” is, and that definition may differ from yours. The bottom line is that anyone can be an angel in this sense.
Let’s take a look at some of the core elements of angel investing.
What is angel investing?
Angel investing is when one or more people invest money in a startup, typically having less than $1 million in annual revenue, for a monetary return. This is done as an alternative to venture capital.
In angel investing, the investor(s) typically provides capital to the business owner(s) in exchange for equity or partial ownership of the company. The investment amount ranges from $25,000 – $1,200,000.
Angel investors are often individuals that have some experience with small business ownership and entrepreneurship. They typically invest their own money into startups or businesses that they believe will be successful. These investors also know specific industries that can help them identify and provide feedback on a business idea or opportunity’s viability.
There are many angel investor profiles. It could be an individual with a retired financial background and possesses the time and resources to pursue this kind of investment opportunity. It could also be someone who was in the military and now has a pension and other investments that require little management time, so they are looking for additional investments to make with their wealth.
Other individuals may come from an accounting background where they have worked for many years for large corporations or even started their businesses before moving on to a different career.
There are many kinds of angels. They can fall into several categories, but we think the best way to classify them is by the amount they are willing to invest in a business at one time. Below is a list of angel groups by investment size:
- Enthusiast angel: From few dollars to 10,000$ per investment
- Professional angel: $25,000 – $200,000 per investment
- Entrepreneurial angel: $200,000 – $500,000 per investment
In this context, the term “angel” is derived from the Angel Capital Association (ACA) investment firm.
Should you become an angel investor?
The decision to become an angel investor should only be considered when you have spare cash and you are looking for new investment opportunities. It is important to have a skillset that will benefit the startups you are investing in, for example being an expert on either the industry you are investing in or the investment you are making, though this is not always required. Angel investing is highly risky, so don’t go investing your retirement money in startups. If you can’t afford to lose your money, don’t become an angel investor.
When you invest in a company, your goal is to get a return on your investment. You want the company to grow and become more valuable, which means you can sell your shares for more than what you paid for it one day. You expect the company’s management team (CEO, CFO, etc.) to be honest with you and regularly update how the company is doing. You expect them to be competent when regularly updated while managing your money (or your employees’ money). You expect them to run their business ethically. Finally, you want them to invent or create something that will make people’s lives easier or more fun (or both).
“The number one thing I want to see before I’ll see a business is whether or not they’ve actually got any sales. You can be disingenuous with the truth but you can’t be disingenuous with money coming into your bank account” – Bill Morrow
If the company grows and becomes more valuable, you may decide to exit that company at a profit profit. If the company is not performing well, then you may want to sell your shares to other people who want to buy it (if it’s a good deal). If the situation is looking more terrible, you might get nothing in return
What do returns look like for angel investors?
In our experience, there are two categories of returns for angel investors.
One type of return is an exit-driven return. This returns one day from holding the shares in a company until an acquisition or an initial public offering (IPO)
The second type of return is a growth-driven return. This kind of return occurs when the business works and grows over time and eventually becomes profitable. When the business grows, the share price will rise at some point in time, which will lead to greater overall returns for investors.
Alternatively, the company’s valuation will rise, and, as a result, the company will be able to raise more capital from a future financing event at a higher valuation. This is a dream scenario for angel investors.
Here is an example of how this might look
The investor invests $100,000 in a company in its early stages. The company raises additional capital at a valuation of $1 million after they have reached certain milestones. The company continues to grow and raise additional capital at higher valuations. The investor exits the investment with the last round of financing at a valuation of $20 million.
In this example, the angel investor received two types of returns: one that is exit-driven and one that is growth-driven. The angel investor’s exit-driven return is $1 million (the total valuation paid for their shares). Their growth-driven return is $19 million (the difference between the $20 million final valuations and their original investment of $100,000).
By taking this view, it becomes easier to understand why many angel investors would be happy to take less than 1X on their money when they invest in a startup. By investing early and getting these growth-driven returns, they end up with much more than just 1X on their money overall. This allows them to continue to invest in future companies with more potential for higher returns based on these types of scenarios. Of course, there are no guarantees that this will happen.
Business angels make a difference – it’s not all about the money
Startups require a lot of help and guidance to get to the finish line. Most startups fail, but some that succeed, can do so spectacularly. Most investors do not know this when they start as angel investors. They are unaware that they will be helping companies grow and that it is more than just about making money. They do not realize how much impact they will have on startups until they become active business angels.
When an investor gets involved in startups, they should expect to help the startup team with any issues that help them push their businesses forward, adding value. This is a big part of the investment process beyond just putting money into the company.
As an investor, you must be prepared to work for your investment returns and help with critical issues that may come up during a startup company’s growth stage. If you are not willing to do this, then a full on angel investing approach may not be the right thing for you at this point in your life. This is why it is essential to understand what it takes to become an angel investor before committing capital into startup businesses ventures that are ill-suited for you because of your lack of experience in the sector or industry you are attempting to invest into.
Here are some of the roles that an angel investor can fill for a company:
Coach and adviser
This is one of the most significant roles that an angel investor can play. The investment is not just about money; it is also about helping the startup with their business strategy and direction over time. This is a big task for most startups, and they will have no idea how to do this without some guidance from an outside investor. This will be a critical role for any angel investor to fill, regardless of whether you are working with an existing company or a new startup.
The first thing a good angel investor will do is provide some coaching to help the startup team. This can help them identify issues that may need to be addressed and provide a framework for managing them.
One of the most significant issues that startups face in their early stages is getting introductions to key players in their industry. The startup may not have a big contact list to use to help them access the right leaders in their field. This is where an angel investor can play a critical role.
As an angel investor, you should provide introductions to key individuals who can help with its growth, success and funding. This could be investors, potential customers, or other influential individuals who may help with critical issues or provide advice that will help the company forward.
Since angel investors make investments without getting involved with the company’s day-to-day operations, they must take on some financing roles to assist startups when they run short of cash during their growth stages. Many startups are undercapitalized during these early days and will need additional financing to move through their life cycle toward their eventual exit event.
Angel investors will often fill this role for startups in need of capital when they want to move quickly and do not want to wait on external financiers or banks that may not have a lot of experience working directly with startups at this stage in their development.
Startups rarely have the resources to hire an outside law firm or even an internal legal team to help them through some of the legal issues that will come up as they grow. Angel investors can become a valuable source of legal advice and assistance for startups that they invest in.
You also need to consider how much time you have available to commit to these kinds of activities. If you are running a small business yourself, you may not have the time or bandwidth to invest in a startup company’s roles. Ensure that you understand what is expected of you if you decide to become a business angel investor with some of your wealth and disposable cash before investing in startups and other small businesses. This will allow you to make smarter decisions about where and how much capital you want to invest in startups. You need to be able to do this before investing as it becomes too late once the funds are depleted and you are involved in an investment situation that requires more work from an angel investor than what is available for you at this point in your life.
What is your angel profile?
Finding your angel profile is a critical first step for aspiring angel investors. It is how you determine the kind of investments that you should make.
You can use your angel profile to:
- Determine the type of investment opportunities that you are most comfortable with.
- Learn about the different types of angel investments and which areas you will most likely be drawn towards.
You should keep in mind, as well, that your angel profile may change as you gain experience in angel investing. As with any field of endeavor, the best way to get better is to remain open-minded and flexible so that you can improve over time.
What is an Angel Profile?
Your angel profile is a set of investment criteria that will help you choose the f investments that fit into your current stage of investing. It includes the industry or niche within an industry that you are most comfortable with.
For example, if you have a finance and technology background, you may find that your angel profile fits best with early-stage technology companies.
If you have a background in marketing and consumer products, you may find that your angel profile fits best with early-stage consumer product companies.
Each person has their own unique angel profile because we each bring different experiences to this endeavor. Our previous work experience can influence which deals we find most attractive. Our hobbies and personal interests can also play a role in our angel profiles because we tend to be more comfortable with investments that use our skills and knowledge.
Your angel profile will change over time as your knowledge and experience grows and your interests change. Suppose you are just starting out as an angel investor. In that case, it is essential to understand how to identify the different types of opportunities that fit into your current investment profile so that you know how to search for them online or through other means without wasting too much time searching in areas where you will not be successful. You also need to understand the types of deals that are not right for you to avoid bad deals and to avoid spending too much time
How Do You Determine Your Angel Profile?
There are two main ways to determine your angel profile:
- By reviewing your past work experiences or other life experiences, and
- By identifying the types of companies or investments that interest you most.
It is a good idea to use both methods to have a complete picture of your angel profile.
To determine your angel profile, answer the following questions:
What areas do you have experience in?
These areas may include a specific industry or business area (such as technology or consumer products), or they may be more personal interests you have (such as hobbies or causes). Review all of the areas that interest you and note those that stand out as areas where you have had some experience. These are the areas where your angel profile is likely to be most vital.
For example, suppose you have a background in technology. In that case, you may have worked for a computer or technology company, or you may have been involved with technology projects outside of work. If you have experience working as an engineer or software developer, this will be an important area of your angel profile.
What areas interest you the most?
You may also be interested in investing in areas that are not directly related to your work experience but that still interest you. These areas may include a specific industry or business area (such as technology or consumer products), or they may be more personal interests you have (such as hobbies or causes). Review all of the areas that interest you and note those that stand out as areas where you have an intense level of interest.
For example, if you like science fiction movies and television shows, you may find that technology investments are exciting. You might want to focus on technology investments related to the video industry , since these would be very interesting to you personally.
How does your angel profile relate to your existing work experience?
Review all of the areas that interest you and note those related to your work experience. For example, if you are interested in technology and have a background in financial products, your angel profile may be most robust in fintech investments. If you have experienced the most vital marketing or finance, you may want to focus on growth marketing and influencer marketing startups.
What type of investment structures do you find most attractive?
Review all deal structures and determine which ones are likely to fit into your angel profile. You may find that certain types of investment opportunities are more likely to be a good fit for your angel profile, while other deal structures are not as well suited to you.
There are multiple different structures that angels investors can use to invest in startups:
1. Convertible Note
This is the typical way that angels invest in startups. A convertible note gives them the option at some point after a set time in the future to “convert” the notes into equity. These notes are usually for a set amount of money, and they come with a discount in the event that the startup is acquired or goes public.
The most common structure is one where the Angel gets a 20% discount on the note if the company does either of those two things. This is called a “20% Premium.”
The notes are usually non-interest bearing and have some sort of cap on how much interest can accumulate each month. In addition, they are often given a deadline by which to convert them into equity. If this deadline is not met, then the option to convert goes away.
This approach is appealing to Angels because it gives them better protection than just being an investor with nothing more than a share of common stock in exchange for their money. The downside is that these notes generally come with caps on the amount of money that can be raised, and they also typically want you to be able to have your money back within a certain time frame.
2. Common Stock
The next most common way that Angels invest is just to give the startup the money in exchange for a share of the company’s common stock. This is one of the least flexible structures, but it does mean that you can acquire a much larger stake in the company as an Angel since there are no limits on how much money you can put into it.
In addition, you are not limited to just one round of investment. You can invest a large amount of money in one round, then come back later and invest again. The company is likely to be very excited about that and you can often negotiate a better deal for yourself because you will have more experience with the company by then.
This approach is appealing to Angels because it does not put them at risk for any debt repayment like the convertible note structure does. It also means that they can invest a lot more money into the startup at one time. However, this structure does mean that they stand to lose all their investment if the company goes under, so they need to be very comfortable with the team and business model if they choose this route.
3. Preferred Stock
Angel investors sometimes choose to make an investment in exchange for preferred stock rather than common stock (if they are allowed to). This type of stock has many of the same rights as common stock (it has voting rights and gets dividends), but it has some additional benefits as well.
Most importantly, “preferred” stock means that you get paid before anyone else when it comes time for a liquidation event like an acquisition or IPO (Initial Public Offering). This is desirable, since you will get your money back before the common stockholders. The terms are usually that the preferred stock gets paid out first, then common stock holders get whatever is left over.
This is not a very common type of investment structure for Angels, but it does have some advantages. It also comes with more risk, because you will typically only receive dividends if the company is making enough money to pay them each year. If the company is not doing well financially, then you will not receive any dividends and could lose some or all of your investment.
Most Venture Capital firms do not invest in startups using “preferred” stock because they want to get paid back before the common stockholders. This is because they are typically investing a lot of money in the company and don’t want to be at risk for losing their investment if the company fails and has to shut down.
Debt is a little more complicated than equity, but it can be a great addition to your angel investment portfolio.
It can be helpful for a startup to have some debt on the books alongside their investors. It may not always be an option for you to invest in a startup, and sometimes the best option is to provide the company with debt financing.
Debt comes with a fixed interest rate, which gives the startup more predictable cash flow. It also gives you a higher risk profile because you will get paid back before any equity investors do if there is ever a liquidation event like an acquisition or IPO. You will get your money back first and then they can divide up what’s left after that.
5. Convertible Debt
Convertible debt is similar to the convertible note structure described above, except that it becomes convertible into common stock rather than preferred stock. This gives the investor more upside potential, because if the company does go public or gets acquired they will be able to buy shares at a discount even though they still have to pay back the debt at some point.
If you are considering making an investment in exchange for convertible debt, then it is important for you to make sure that your investment comes with some sort of security (such as a warrant). This way you can protect yourself in case there is never an acquisition or IPO and you never get your money back. This security lets you convert your debt into common stock, and thus protect yourself.
What types of companies do you find most interesting?
Review all of the business areas that interest you and make a note of those that are most interesting to you.
Business areas such as life science, alternative energy, and computer software are likely to give you a good return on investment because there is high demand for these products in the marketplace and you will be able to get a share of that market.
These will likely be areas where you can make the highest return on investment because they are the areas where your knowledge and experience are strongest. They may also be areas where there is less competition because there aren’t as many other angels who invest in these business areas as there are in other areas.
For example, suppose insurtech companies interest you and you happen to work in corporate insurance operations.. In that case, you may want to focus on corporate insurance companies as your main angel profile. If you are especially interested in augmented reality products but have no background in this area, you may still want to invest in this area and make several small investments in order to learn about the industry.
Traits of a great angel investor
The best angel investors can connect the dots between a company’s potential and the market, and they can make the right decisions at the right time. Angel investors who are willing to back meetings with startups investments that have a better chance of succeeding than those who just want to stay on the sidelines.
The best angel investors are often entrepreneurs themselves. They know how hard it is to start a company, and they have empathy for it. They also have experience of what it feels like to fail, and they can see when others are going in that direction.
You should be able to follow your gut instinct in choosing investments. It pays off if you can predict trends by connecting the dots correctly. You should also do as much research as possible before putting your money into any investment, and you should always learn from your mistakes if you make any.
Ultimately, business founders and entrepreneurs are the ones that know best what it takes to become successful, so you should be able to trust their judgment and follow it.
Great investors can pick their winners and focus on the big opportunities. They have a good sense of what is happening in the market and have a vision of where it is going. They also tend to be more interested in the long-term potential of an investment than short-term gains, and they are willing to put their money into things that make a difference.
They can spot the trends and opportunities that business founders often do not. They can focus on the big picture, and they can see the potential of an investment even if it is in a niche area.
Great investors have persistence and patience, and they are prepared to take the time to get things right. You should be able to stick with a company during its difficult times, rather than cutting your losses quickly when it is struggling. Many angel investors will invest money into a company when it has already had some initial success, so they understand that it will take time for the business to get off the ground. Great investors are confident enough in themselves that they do not fear failure, and they are willing to stick with their investment strategy until they make a return on their investments.
Great investors are also willing to wait until their portfolio of companies is ready to scale. They know that if they rush things, they will not get the best results, so they will be willing to wait until they are ready for further investment and expansion.
Great angel investors are trustworthy, and they will do their best to keep their word. They will also be honest with the companies they invest in, and they will not make any secret plans that could harm the company’s future growth. They can also gain other investors and business founders’ trust, which is key to building a good reputation as an angel investor.
Great investors are thorough, and they will do their best to meet the needs of their companies. They will be able to understand what the business needs, and they will be able to make decisions in the company’s best interests. When they make investments into a company, they are willing to put in the time and effort required to make sure it works out well for both parties.
In summary, great angel investors often start as successful entrepreneurs who can see where trends are going before others can. They understand how difficult it is to create their own company, so they have empathy with those who need their help. They are also confident enough that they do not fear failure, making them more willing to invest when others might not be willing. They can think on their feet, and they also have a good sense of what is happening around them. They can spot opportunities where others cannot see them, which helps them connect the dots between a business’s needs and its growth potential.
Has Silicon Valley lost its lead?
The Silicon Valley ecosystem is changing the world. It is changing the way that we work, it is changing the way we live, and it is changing how we are entertained. It is allowing us to do all of these things better, faster and cheaper than ever before. This change is that startups are working hard in Silicon Valley to find new ways to change everything around us. They also need great investors who will help them succeed by investing in their startups. This makes it vitally important for Angel investors to be involved in Silicon Valley.
Silicon Valley has been leading in the creation of new companies and the funding of them. There are many great startups there that are on their way to becoming global winners. They have also been extraordinarily successful at getting funding, so if you want to get into startup investing, you need to learn why the Silicon Valley has been so successful at funding startups and how you can adopt some of their techniques to make your life easier as an investor.
The secret formula for Silicon Valley’s success is that they have created a culture of investment in which they all work together to make investment in startups easier. This means that there are lots of angels, VCs and incubators in Silicon Valley that make it easy for people interested in investing in startups to find great deals locally rather than having to travel long distances or frequently fly if you want access to great investment opportunities globally. This also means that it is easier for investors and entrepreneurs who live locally than it used to be.
Has Silicon Valley lost its lead?
No, Silicon Valley has not lost its lead. It has however, created a hurdle for people who want to invest in startups. The reason is that the cost of investing in Silicon Valley is astronomically high when compared to the rest of the world. Early stock option grants and liquidation preferences make it very difficult for people who want to invest in startups to do so. They have even made it difficult for venture capital firms from other parts of the world to invest in US startups.
How has Angel Investing changed over time in the valley
Many investors don’t believe it has changed much over time, as fundamental principles still apply. The only difference is that there are more angel groups in more cities worldwide now than there were 20 years ago. The growth of angel groups worldwide means that you can now find more deals locally than you could 25 years ago. This makes it easier for you as an investor to find great deals locally where you live rather than having to travel long distances or frequently fly if you want access to great investment opportunities globally.
It is just as hard to invest in a startup as it has always been. It is however now much easier to find great deals locally than it used to be.
The Emergence of Crowdfunding
Crowdfunding is a new way for people who have succeeded in life to help other people and projects succeed. Crowdfunding works well for startups because when you help them succeed, they will naturally want to work with you or hire your services. This means that by helping startups, you can benefit directly from what you do. It also helps that crowdfunding makes investing in startups easier, because it eliminates the need for angel groups and makes it possible for many more people around the world to invest cheaply in startups.
Crowdfunding has made it easier to invest in startups. Before crowdfunding, you had to be in Silicon Valley to invest, whereas now there is an online funding platform for startups in every country worldwide. This means that you can now find great startup investment opportunities where you live rather than having to travel long distances or frequently fly if you want access to great investment opportunities globally.
What can Angel Investors do to help the Silicon Valley ecosystem succeed?
The Silicon Valley ecosystem relies on people who want to invest in startups. If you don’t want to invest in startups, then the Silicon Valley ecosystem can’t succeed. The only way that the Silicon Valley ecosystem can succeed is if it is supported by people who are willing to help startups grow by investing in them. This means that Angel investors need to help the Silicon Valley ecosystem succeed by being involved in it and investing in startups.
Silicon Valley is still the best place in the world to be an investor
Yes, Silicon Valley continues to be the best place in the world to be an investor. If you want to invest in high-quality companies, then you need to be based in Silicon Valley, where they are being created. If you are looking for a great investment opportunity, then there is no better place on earth than Silicon Valley. This is because startups are being created at a much faster rate than anywhere else in the world, and as a result, there are more of them available here than anywhere else. This means that there are many more great investment opportunities here than anywhere else on earth. If you want to invest in startups, then you need to move to Silicon Valley and get involved with everything that is happening here.
Get Involved In The Valley
To make money from investing in startups, you have to invest early and often. This means that one of your best chances of making money from investing in startups is by being involved with everything that is happening here and finding great deals locally as early as possible so that you can put your money into them before anyone else does.
How much money do you need to be an angel investor?
The common myth is that you need to have a lot of money to be an angel investor. While there is no shortage of millionaires and billionaires who are active angel investors, the truth is that you don’t need to be that rich to be an angel investor. The amount of money you have or don’t have has little to do with your ability to be an angel investor.
What is important is that you understand how angel investing works and what you need to do to work for you. That’s all that matters.
It is true that with more money comes more investment opportunities. Still, the truth is that there are many excellent investment opportunities out there for investors who only have $10,000 or less. While many investors with a small amount of capital would like to invest in large companies like Google or Facebook, it is essential to remember that many great companies are being built outside of Silicon Valley, Austin, and New York City. These places are simply too expensive and crowded for these types of businesses to emerge. So if you want the opportunity to invest in these types of companies, you must look beyond the big cities and look at companies being built in smaller cities across the United States and around the world.
Many of these businesses raise money from angel investors at very early stages. So if you have a few thousand dollars to invest, there is a good chance you will be able to find an excellent opportunity to invest in. However, a high degree of risk always exists.
How much money should you invest in an angel investment
When it comes to angel investing, many small investments may be better than few big ones. The average size of an investment made by an active angel investor is between $25k and $100k per deal. But the truth is that most investors don’t want to commit $100k or more per deal. So while the average size of a financing round for companies that do raise capital is between $250k and $1M, many investors choose not to invest that much money in a single round. Most investors will invest between $10k and $25k per deal in an early stage startup, and then wait until another round of financing occurs before they make another investment into the same company.
The biggest mistake most investors make when they first start investing is thinking that they need at least $100k or more before they can begin investing. This is simply not true. The truth is that you can find great opportunities to invest in with as little as $10k or $20k. If you have a family member or friend who wants to be an angel investor, you can partner up and combine your resources and invest together.
The truth is that if you want to be an active angel investor, it’s a good idea to start small and get your feet wet by making a few investments (and mistakes). Once you get the hang of things, you can increase your capital investment as you see fit. But there will always be plenty of great investment opportunities for investors who are happy to invest in amounts between $10k and $25k per deal. There will also always be businesses that are raising money at smaller amounts. Even with only $10k or $20k invested in a company, it’s still enough money to earn some serious returns on your investment if the business turns out successful and sells for several million dollars or more in value.
How to overcome the loss of faith (and money)
As the saying goes, “If you want to know what someone believes in, look at his checkbook.”
Despite this, many angel investors lose faith in their investments. They feel like they’re throwing money away, and they become afraid to invest further.
The problem? They don’t know how to think about their investments.
They believe that the way they think about an investment is the same way everyone else thinks about an investment. They think that, because they are investing, they need to calculate the ROI of every investment to determine whether or not it’s a good investment.
But, that’s not the way that angel investing works.
First and foremost, you should never think about your investments in terms of money. Money doesn’t matter in angel investing. What matters is whether or not you believe in the company and its founders enough to invest in them.
There are a couple of ways to think about your investments:
Think of your investments as an educational experience
We know this sounds a little bit cliché, but it’s the truth. Your investment should be an educational experience that will help you to grow as an investor, as a person, and as a human being.
If your investments are helping you to grow, then that means that you’re growing as a person. That’s the real reason why you should invest in early-stage companies. Sure, you may lose some money here and there, but if you’re learning from your mistakes and growing as a person, then your losses are worth it.
Think of your investments as a way to help others
Rather than looking at your investments as an educational experience, you should view your investments as a way to help others.
For example, when you invest in an early-stage company, you are helping that company to grow. And, by growing, they can create jobs for other people (they’ll have employees), and they have the potential to create value in their community (they’ll be able to employ people within their organization).
Your investment is helping others. That means that your losses are worth it because you’re creating value for society by helping these companies grow and achieve their potential. And, by doing so, you’re also helping yourself by gaining experience as an angel investor.
Think of your investment as an experiment
This is another approach that a lot of people use, and it’s also a good one. If you’re in a startup and you’re not sure if it’s a good investment, then just pretend that it’s an experiment.
Think about it this way. If you were to pick up a rock, would you be able to predict what was under that rock? No, of course not. You might find gold, or you might find nothing at all. All you know is that the potential for something valuable is there. So, when you invest in a startup, think of your investment as an experiment. You never know what will happen; all you know is that the potential for something great is there.
A good example would be Twitter, which started as a side project for Jack Dorsey, Evan Williams, and Noah Glass. None of them knew where the company would go. They just knew that it had potential, so they continued to invest in it.
In conclusion, you should never think about your investments in terms of money.
An investment is more than just a transaction. Your investment is an educational experience, it’s a way to help others, and it’s an experiment.
You never know when you’re going to find something valuable; all you know is that the potential for helpful something is there. So, continue to invest in new things and be bold. You’ll never lose if you keep trying new things because even if you fail to find something valuable, then at least you’ll have learned something along the way!
Section Two – Angel Networking
In this chapter, we will discuss how to network with other angel investors and startup founders. This can be done in different ways.
It is important to establish a network of people who you can trust and who you can provide support. These people should have more experience than you in angel investing. In angel investing, knowledge can provide power and leverage. Furthermore, if you can learn from the mistakes of other investors, it will save you a lot of heartache and money.
You can build up your network of angel investors at different paces, though it is a process that typically takes years and never stops. You don’t have to call everyone in your network every day or even every week. Just make sure that the people in your network know why you are calling them and what you are looking for. These types of conversations will be more productive if they are not just centered around getting opportunities for investing but also about learning from each other.
How to take your first steps in angel investing? Once you have decided that angel investing is right for you, you need to decide the quantum of investment that you want to utilize in terms of your investment capacity and also the amount of investment that you are comfortable with. Secondly, you need to find the type of companies you are looking to invest in.
Gathering into the wisdom of some of our ambassadors, Eneko Knor comments:
“As an investor, everybody talks about the success stories. Look, I personally have three exits, but they have companies that fail and actually they fail for different reasons” – Eneko Knörr
You can adapt your goals as you gain experience. As Brad Feld enlightens us:
“Originally, my goal was to run a marathon in every state by the time I turned 50, and I’m 54. So I clearly didn’t accomplish that goal. But like every good entrepreneur, I’ve just modified it. And so now my goal is simply to run a marathon in every state before I die” – Brad Field
Your Investment Capacity:
Your investment capacity is defined as how much money you can invest in angel investing as a whole.
This should include your liquid cash, bank balance, and also your investment portfolio investments. You can also add any other assets that you have which are not financial to this number. Your capacity should be big enough to accommodate your investment decisions as well as your business decisions. It is important to know your maximum capacity, because if you don’t, it will be difficult to make decisions about how much you should invest in each company.
Your Investment Capacity should also include your time and effort investment. This includes returning phone calls, meetings, due diligence, etc.
For example, if you have a capacity of $50K, and you are planning to spend 10 hours per month, then your capacity is $5K per hour.
This is just to illustrate that your investment decisions should be in alignment with your capacity.
Your Quantum of Investment:
Your quantum of investment is defined as what amount of money you are comfortable with investing in each startup on average. This can be different for each startup.
A good place to start is to invest in startups that are valued at under $500k, because these startups are usually early stage and have high growth potential. They also typically have a lower risk associated with them.
After you have invested in a few companies, you can decide if you want to invest in larger companies or not. The advantage of investing in larger companies is that they are more stable, typically having more cash reserves and bigger teams. This means that they can make a bigger impact on the world with their product, service or cause. However, these companies also have higher risk than smaller companies due to a higher burn rate. There are also more competitors at more mature stages which may lead to other competitors stealing market share from them.
For example, you may decide that you want to start investing in companies that are under $1M and have the capability to grow rapidly. This is because you want to generate more returns on your investment.
It is important to pick a number that is realistic for you as well. If you invest too little, then your impact will not be very significant, and if you invest too much, then you can lose a lot of money, time and effort if the company fails. Always be comfortable with your investment decisions, and don’t let anyone pressure you into investing in startups which are not a good fit for you.
Your Investment Strategy:
Your investment strategy defines how many companies will you invest in at a time and how much money will be invested into each company. There are two distinct strategies which we have seen: Investing in multiple companies or investing in one company at a time. You can also decide whether these investments should be of the same size or different sizes based on the risk level of that particular startup and how much you like it. Many investors choose to start with one or two investments in their first year and see what happens with them before making any decisions on scaling this up further. You can also decide what kind of companies will these investments go into based on the risk level they have.
Deciding on what kind of companies to invest in:
You can decide on the kind of companies you want to invest in based on the following factors:
Market size: The market size is defined as what is the potential market for a particular product, service or cause. You need to consider things like population size, number of people who are affected by a particular problem, income levels, and other factors in order to determine market size.
Market Penetration: This factor refers to how much of the market has been captured by competitors. If there are no competitors in a certain field or industry then that means that you will be able to capture more customers for your product or service than if there were multiple competitors already working in that field. The biggest advantage of investing in startups with low competition is that you will also have better bargaining power with them because they do not have many other investors from whom they can get funding from. They may also be willing to give you more equity than they would if you had to compete with more investors for the same amount of funding.
Management team: You have to consider the management team and the people involved in making the product or service. You want to invest in a startup that has a strong management team with a track record of success. Management should have experience and knowledge that will help them run the startup efficiently. The management team needs to be able to execute their plans effectively and efficiently. They also need to have a good amount of drive because they will be working on their startup full-time.
Product or Service: You need to consider whether you like the product or services being offered by a company. Your investment will be based on how well you feel about the products or services they offer, so it is very important that you know about what they are providing and whether it is something that you would like to use yourself. If you can’t use what they are offering then why would anyone else? If it sounds interesting then go further and investigate more into it by speaking with them personally if possible, checking out their website, reviewing their Facebook page, Twitter account, and other sources of information.
Market opportunity: What is the potential market size for this type of product or service? How many people will buy it? What is its growth rate? How much money can be made?
Meeting Startup Founders and Other Angel Investors
There are many ways to meet startup founders. Here are a few ways you can meet startup founders:
1. At a startup event.
If you want to meet startup founders, then you should attend startup events. You can find several events where startups pitch, for example : startup grind events or Angel’s Den. Find an event and go there to meet some startup founders. You are likely to find other angel investors at these events.
2. At an accelerator programme
There are many accelerator programmes all around the world, such as TechStars, 500 Startups, AngelPad, Seedcamp to name a few. Although some of these provide initial funding for startups, they are always keen to showcase their companies looking for investors that can follow through investing in these companies, so it’s always good to look at working with accelerators, contributing your experiences, and attending their showcase events.
3. At a business school
Business schools are a great source of startup founders. If you have done an MBA yourself, there will usually be entrepreneurship groups and alumni that are working on interesting startups. Business school alumni can prove to be a great source of deal flow, especially if you can connect with Ivy League business schools.
A good way to get into these Ivy League networks is to register for a short course there, which will allow you to become alumni. Most top universities are offering these types of courses for under $5000.
4. At conferences/Meetup groups
Another great way to meet startup founders in an informal setting is by going to conferences or Meetup events. If you want to go to a conference, make sure you have a list of potential investors at the conference before going there so that you can meet them beforehand and pitch your startup idea once you get there. There are many great conferences around the world for startups.
The same applies for Meetup events as well: make sure that you have a list of potential investors and entrepreneurs in your area before going there, and pitch your idea once you get there by bringing along some business cards with your name on it (so that they remember who you are).
We would recommend LinkedIn as a great way to meet other angel investors and startup founders. It is an online professional networking site for business people. You can search for other angel investors on LinkedIn by using the search function. LinkedIn makes it easy to connect with people in the same ecosystem and niches that you are interested in with their filter functionalities.
Adding value to startups as an angel investor:
It is of common knowledge that startup founders need money. As an angel investor, you have to make sure that you bring more value than just money to the table.
“I think if an investor thinks that he’s better than the founders, it’s not going to work out. It’s not going to work out for either of them. I think it’s often very much an ego trip for the investors. So, I really tried to do something about that and give the power back to the founders again” – Bill Morrow
Angels can be valuable partners to startups in the following ways:
1. Sales expertise
The startup has a great idea and good product or service but they can’t get traction in the market or raise enough money. As an angel investor, you can help them by bringing your business development experience and connections to the table. You might have industry connections, a network of potential customers, or a connection to a channel for sales that is more effective. You may be an expert in SaaS models and know how to bundle the product properly, create the perfect sales funnel or tailor the best pricing strategy for them.
2. Strategic Advice
The startup has a good product or service but they are not getting enough traction and need to make some changes. As an angel investor, you can help them with your strategic insights and advice. This may be product management experience, logistics experience, operations experience or any other thing that can get the company moving in a more slick way
3. Professional Advice
It may be that the startup does not need any money but they are struggling with hiring decisions or other operational decisions, or knowing that is the best way to scale up. As an angel investor, you can help them with your professional advice and contacts in the industry that they can benefit from. You might have industry contacts that can be helpful to them or you may have good ideas about how to tackle certain problems in their business operations. This type of advice will be more valuable if you are already investing in other companies and if they are asking for your advice on how to do something similar in their company.
4. Industry Insight
Sometimes startups will just want advice on how to do something better within their industry – for example – how to do a better job at customer support or how customers perceive their brand or product.
The startup has no money but they have a great idea and they are looking to raise funds. As an angel investor, you can open doors for them by giving them introductions to other angel investors or VCs. You might know other investors who might be interested in listening to their pitch or you might be able to introduce them to some potential customers who can see the potential of the product. This can be especially true if you decide to concentrate on a specific geography or topic, and you start co investing with other friends and colleagues.
Create your angel profile
Your angel profile is a description of your investor’s professional background. You should point out relevant achievements and assets that can be useful for companies, things that make you attractive.
The purpose of your ‘angel CV’ is to position yourself as legitimate and credible in front of potential startup founders which are looking to raise funds. It is also a way for other investors that are investing in the same fundraising round to get to know your expertise and abilities to add value to the company.
Your angel profile can live in different places. It should be short, straightforward, and relevant. The angel market is very competitive. Investors who cannot communicate their experience clearly are unlikely to be successful in this type of investment venture.
The main places where investors publish their profiles are Angel.co, Linkedin, Crunchbase, and Pitch Book. Some of these networks allow investors to link to the investments that they have made, so startup founders can compile lists of people investing in a specific field.
Personal web pages are also very useful for investors to share their views on any topic and also gain a following of their own. You can check here some of our ambassadors:
What are some key items that should be included in an angel CV? Here are just a few:
1. Companies You Have Invested In
If you have invested in companies, the following companies should be listed in your CV.
List the company name and the size of your initial investment. This is a good way to demonstrate your value and credibility as an investor. You can also list the post-investment performance of each company. You might want to show how much you made on each investment or lost if any. However, keep in mind that this information might not be that useful to other investors when they are trying to evaluate your credibility.
2. Investment Background
List any investment experience you have had so far as an investor, even if it is limited or non-existent. This information gives you an edge over other investors who have no experience at all, or limited experience with startup investing. It shows that you are willing to learn and grow as an investor, and that you are eager to gain new skills for this area of business investment. It also shows potential business partners and startups that you are qualified enough to invest in them despite a lack of experience, which reduces risk for them as well.
3. Exits or Successful Investments
This is very important information for any potential business partner or startup founder, because it demonstrates that your investment helped add value to the company so much that it was sold for a higher price than what it was worth when you first invested.
4. Professional Work Experience
List any experience you have had working at major companies, especially if you have held senior roles. This gives your potential business partners and investors the impression that you can work with, and add value to, larger companies. It also demonstrates that you are well connected with other senior individuals.
List your education background and any degrees you’ve earned or accredited certifications. Having a degree or certification shows that you are qualified enough to learn about certain topics, such as investing in startups and business management, and able to communicate your knowledge effectively. Include the specific field of study for each degree or certification if possible. For example, if you have an MBA from Harvard University in finance, this will demonstrate that you have a high level of education in finance and investment-related topics, which is important since these skills are vital to investing successfully. The more advanced degrees and certifications the better – so don’t hesitate to list them all!
6. Extra-Curricular Activities
List any relevant hobbies or extracurricular activities which show off your leadership abilities or general knowledge about a certain topic. Examples might be creating your own charity, being on the board of directors for a local non-profit, or writing for a blog. This information demonstrates that you have a passion for helping others and are willing to use your time and money to do so. It also demonstrates that you are interested in learning about different topics and being involved with the community around you. This is important since your reputation as an investor will be based on your community involvement and ability to help others.
7. Startup Experience
If you have any experience working with startups, list it in your profile under this subheading. Include any companies you have worked with in this manner, even if you were an employee instead of an investor. List the company name, your position, and the amount of time you spent working with them. This information shows that you are familiar with startups and understand how they operate, which is important to investors who want to invest in a company. If possible, list the startup’s performance after you left or were no longer involved with it. This demonstrates that your work had a positive effect on the company’s performance after you left or were not involved in day-to-day operations anymore.
How to market yourself as an angel
If you thought that marketing yourself as an angel was not necessary, you were wrong. You will have to market yourself if you want to be a part of the angel network. The first step is to get your name out there. Make sure people know who you are and what your interests are. If you do not have a blog or any other presence online, now is the time to get one set up.
“I realised also that the importance of being out there and telling the entrepreneurs that you are there and that you are an investor and getting all these signals, which I realised that it was really important to get to know the best entrepreneurs” – Eneko Knörr
The reason why you need to establish a presence online is that this is the one place where you will be able to reach a lot of people at once. The other reason why you need to do so is because being well-known or marketed will gain you access to the best deals.
When you first start, if you are in the market for a great deal, you will most likely find it online. Deals do not just pop up on your doorstep. You will need to search for them, and the best place to look is online. This is why you need to have a presence online so that people know who you are and what you are looking for.
However, the hottest investment opportunities do not even make it online. You will have to be on the lookout for these opportunities as well within your extended network.
Online and offline self marketing
You will need to establish a presence both online and offline if you want to be able to market yourself as an angel. The reason is that you need to reach as many people as possible. If you are well-known online, chances are that people will know about your investments, but the money that you raise will also come from offline connections.
It is important for you to be able to reach out to everyone and give them a chance to work with you or invest in your opportunities. Offline connections may not be as lucrative, but they can make a great contribution in the long run.
The best way for you to market yourself as an angel is by establishing networking contacts through your network of friends and family, colleagues, schoolmates or even strangers that share common interests with you. This is one of the best ways for you to get leads on investment opportunities and manage your growing network of investors.
The top ways to market yourself online are:
1. A personal blog
This is the most common way for you to establish a presence online. Just like any other blog, you will need to make sure that your blog is informative and interesting. You do not have to be the best writer in the world if you are an angel investor or a startup entrepreneur. Just make sure that your writing style is efficient and easy to understand. And talk about the things that you are interested in investing and your passions.
2. Social media pages
Having a presence in social media is another great way for you to market yourself as an angel. You can use this medium to present yourself as well as your investment interests. This will also help you gain more followers which can help spread the word about your business or investment interests. There are a lot of people who are on Twitter, LinkedIn or Facebook, so posting updates about yourself and your business should not be too hard.
3. Angel directories
There are a lot of directories online that list angel investors and their investment preferences, deal size, amount of money that they are looking for in investments and other details that might come in handy when looking for investors. These can also help you see what type of connections you already have with other angels online, which might lead to opportunities that appear online but have no interest from any investors.
On the other hand, there are always ways that you can market yourself offline:
There are many events where you can attend and meet other angels in person. You can use these events to get to know other angels as well as their investment preferences. This will help you narrow your search for investors or opportunities to invest in. Most angel investors who attend these events often share their investment interests on the net, so you can also look into that.
2. Startup events
There are a lot of startup events that you can attend and pitch your ideas. You can also look for other opportunities to invest in or even be an advisor or mentor to other entrepreneurs. These types of events will also help you establish your investment interests and your brand as an angel investor.
3. Angel investing clubs
You can also create a local angel club, which will help you meet like-minded people who have the same interests as you do. There are already existing clubs that you can join, but if there is none near where you live, then it might be a good idea to start one yourself. This will not only allow you to meet like-minded people who have the same interests as you do, but it will also help grow your network of investors and opportunities.
You may be wondering if it is necessary for you to market yourself if you want to be an angel investor? Well, it is actually necessary because this is how investors will get to know about your investments and what type of investments that interest them the most. This is one way for them to decide whether they are interested in investing in your business or not. It might seem like marketing yourself may not be worth all the work at first since it will take a lot of time and effort, but it will definitely be worth it in the end.
Be sure to take these ways to market yourself as an angel investor into consideration if you want to be successful in your investment endeavors.
What is your angel sweet spot?
In business, there is a lot of talk about your “sweet spot” or “niche”. But what exactly does this mean for angel investors?
A sweet spot or niche is the place where you can be most effective and most satisfied at the same time. It is where your interests, abilities and ambitions align.
The sweet spot for an angel investor can be ideally in many aspects, where varies from on an individual basis.
Many angel investors are passionate about a particular industry and enjoy working with companies that are in that industry. For example, an angel investor who is passionate about the Internet may be more interested in SaaS companies.
2. Stage of company
There are many stages at which a company can seek funding. Angel investors who are particularly interested in helping companies that are seeking venture capital funding, may focus on angel investments that will help bridge the gap between an entrepreneur’s initial raise and a VC round. Other angel investors may focus on later stage startups that have received some venture capital investment but need more to grow and scale effectively.
3. Stage of financing
The stages for an early stage company seeking financing include (but are not limited to): seed or pre-seed, series A, series B, and series C. Although most angels focus on the early stages, this doesn’t mean that they can’t keep adding value to companies by following through and keeping board positions. The timeframes for each of these stages can vary widely depending on the type of funding and the type of company seeking funding. An angel investor who is most interested in helping companies raise series A or series B rounds may spend most of his/her time working on deal flow work for those rounds. An angel investor who is focused on pre-seed or seed deals will spend more time building relationships with potential founders and learning about their ideas to determine if their business fits well with the angel’s interests and abilities.
4. Company stage in its lifecycle
Angel investors that are interested in investing in companies that are at the start of their lifecycle (e.g., a new startup) may focus on identifying companies that have a unique idea, but need funding to get off the ground. They may also focus on helping those companies get to traction and help them to develop a path toward profitability. Angel investors who are interested in later stage companies may be more focused on helping those companies scale and grow effectively.
5. Investment Size
Some angel investors are interested in investing small amounts of capital (e.g., $10,000 or less) and others are interested in investing larger amounts (e.g., $1 million or more). This may be a function of the angel’s financial situation, access to capital, appetite for risk, and tolerance for deal flow. An angel investor who is able to invest larger sums may have a portfolio of investments that are larger than those of an angel investor who is only able to invest small amounts.
6. Investment Type
There are many different types of investments an angel investor can make, including ones that are debt-based or equity-based. Angel investors who are interested in debt-based investments may be more interested in lending money to companies that need a bridge loan or other type of credit facility. Angel investors who are interested in investing equity may be more focused on helping companies raise equity financing rounds.
What is an investment thesis
An investment thesis is a well-defined, reasoned argument on why you believe a specific investment will outperform the market or other similar investments.
It’s extremely common in Silicon Valley to see equally smart firms picking very different outcomes. These range from passing on a deal, to offering a widespread range of term sheets. These disparities boil down to each venture firm’s investment thesis — the internal rules that guide the partnership’s investment decisions. Every form of investor possesses a form of investment thesis. It’s what guides their philosophy in investing, which involves a wide aspect of parameters. Any good investment firm, in my view, will invariably have an internal language that they use to communicate with each other about possible investments with some degree of precision. It’s an indication of having a fairly precise and fine-grained sense of what one seeks. There are four dimensions involving the concept of investment thesis. They are as follows:
1.Stages or Risk Profile
Firstly, the very disciplined stage is the investment stage. From an entrepreneur standpoint, some people prefer huge returns, some people prefer growth, and some people do late stage studies. If one thinks of the continuum from early to late stages, investment lies precisely in the middle. An early product market fit is ideal. Product risk should be avoided unless one wishes to take a lot of business risk. Execution and risk involved have to be considered. A typical deal is acquired from early customers, the CEO’s, and the salesperson. Apart from early customer traction, it involves a tedious path to establish a predictable and repeatable model. First and foremost with stage, it always is the proxy word for risk. It really is. The kind of risk one wishes to underwrite is another way of expressing one’s competence. Early stage investors fundamentally underwrite product risk and frankly and team risk. Mid-stage investors underwrite good market execution risk and sales and marketing execution, while late stage investors usually underwrite evaluation risk.
2. Specifics evaluated by VCs
In general, an investment thesis guides you to evaluate companies one way or another. Firstly, the big picture and long-term trends act in your favor. Secondly, considering the opposite of that which is near-end traction. As an early stage investor, one should look for the big picture trends that are going to happen in the future. Such trends that occur presently, and their manner of interpretation is actual traction. When a customer’s buys, they get excited and one can see renewals, it is a form of evidence that the market is the best time to invest. Big picture trends and near-end traction are very important Near-end execution and near-end traction is a proxy for management. Companies that execute well in the near term on average continue to execute, and companies that let drop-off on the near term will be a disappointment.
3. Investment Management by VCs
Investors have different ways in which they like to plan their actions and add value to their investment once they’ve made their decisions. As a venture board member, there are numerous decisions to be made. The first decision would be hiring and firing suitable board members and CEOs. The second decision revolves around the board members that finance the company. The real question for a CEO is know if investors would stay during hard times.That’s the second topic to to calibrate with a Venture investor. Thirdly, agreement on broad strategic direction.The typical VC after five years in the Venture business is a functional expert in nothing. Everything they know is outdated. The kinds of strategic alignments required in advance are key factors. Lastly, as a board member, electing when to sell the company and when not to sell the company is important. Both of those in different ways can be a hard decision.
4. Investment Domains of VCs
The ability to do all things is given to a very select few. Sometimes, an investment allows interaction with the end consumer. Increasingly more success of software companies involves selling their services and products, which in large part is a function of how successful they are able to sell to their consumers. Investment options can include a wide range of options such as Enterprise softwares. Over the last 10 years, roughly 130 exits above a billion dollars and roughly two thirds of them are enterprise software and roughly one third of them are consumer based, with sub %10 being everything else. As an investor, there are numerous opportunities available in such fields.
Here are some resources that can be helpful as you build your network:
AngelList: AngelList is the largest online angel network in the world. Created in 2010, the platform has a mission to democratize the investment process and to help startups with their challenges in fundraising and talent.Created in 2010, the platform has a mission to democratize the investment process and to help startups with their challenges in fundraising and talent.
TechCrunch Startup Battlefield: TechCrunch is an online publication for new technology companies and startup businesses. They organize competitions called Startup Battlefield where you can network with other startups.
Startup Digest: A list of startup events in your city.
Meetup: Meetup is a platform for networking with people who have common interests. Find a meetup group in your city and attend events to meet entrepreneurs, investors and mentors who are interested in startups.
Startup Weekend: Startup Weekend is an event organized by entrepreneurs to help kickstart early stage companies. You can participate as a team member or mentor during the event. It’s a great place to network with other entrepreneurs, investors and mentors in your city or region. You can register as a volunteer here too.
AngelList Syndicates: If you want to learn more about angel investing, you can find experienced investors who will syndicate with you on AngelList. Some of the best angel investors and startup founders in the world have their own syndicates on AngelList.
Crunchbase: Crunchbase is a database of tech companies, people, investors and events. It’s a great source of information on startups and their founders, investors and competitors.
Eventbrite: Eventbrite is a platform for organizing events. Some startups may use the platform to organize fundraising events. If you want to attend such an event, you can search for it on Eventbrite.
Generating deal flow
Deal flow is the lifeblood of an angel investor. If a group of angels are devoid of continuous new investments opportunities, they will get access to the best opportunities available to them. Networking is an art not a science. It’s a critical skill which must be done intentionally and decisively. Thus, an efficient network can resolve most issues regarding deal flow. Various tactics and tips include:
- Supporting talented people in the network. There’s no substitute for firsthand knowledge and people with such experience are rare. The driving factor of whether a startup succeeds or fails is the people who found it. Talented individuals have the highest odds of making a business work.
- Second-order effects: Backing the best people’s best people. The next best thing to command primary knowledge of a founder’s excellence is hearing from someone trustworthy. This network can be extended, but it would be ideal to limit excessive and unnecessary references.
- Not changing the action plan. An ideal career path and personal choices should already yield deal flow. The best way to obtain such rewards is to continue to excel in pre-established fields with optimum levels of success . It isn’t sustainable to alter one’s entire lifestyle to obtain better deal flow. However, under the circumstances of improper deal flow, drastic measures may be required.
1. Online Angel Networking:
A useful way to market yourself and connect with other investors These networks such as AngelList, and FundersClub allow you to network with other angels and syndicates that make investments into startups.
“Some of the angel investors, we partner with each other and we help each other to find the best deals” – Eneko Knörr
Best of all, most of these networks are free.
Another way to source deal flow is through syndication. We will talk a lot more about syndication in a different module. In a syndicate, a group of angel investors pool their money together in order to invest into the same startup.
Syndicates are a great way to get access to deals, but you need to be careful. Many syndicates have very high minimums and some syndicates require a substantial amount of capital.
“Number one, make investments. The kind of an aspiring angel investor is not helpful to entrepreneurs and angel investors help entrepreneurs” – Brad Field
For example, most often than not, the deal flows within angel Syndicates comes from:
AngelPad – This is the syndicate that I personally recommend. Angelpad has a lower minimum requirement and invests in about 12 startups per batch. After each batch, Angelpad syndicates are available to the public.
SyndicateRoom – SyndicateRoom is a UK based platform that focuses on startups in the UK and Europe. SyndicateRoom has a 1000€ minimum and investments are structured as convertible notes.
The second way to source deal flow is via word of mouth. If you have a friend that is an angel investor, then you should ask them about startups that they are interested in.
Section Three – Startup Basics
In this section we are going to explain what is a startup and the different business models and fundraising rounds that startups can have. For some, these terms are very confusing so let’s go through each of them.
A startup is an emerging business that is trying to solve a problem or address an opportunity, in the most efficient and economical way possible. Some of the common characteristics of a startup are:
It is an early-stage company that has not yet reached maturity. It does not have a proven business model. It may or may not have revenues. It is a company that has not yet reached the stage where it can grow without outside help.
We mostly refer to technological startups, those that don’t require a lot of fixed assets. More often than not, startups will have a business model that is quite different from that of a traditional company and would require multiple rounds of funding to optimize their business model and grow to maturity.
The different startup funding rounds
The process of funding is quite different from a traditional company as it involves several rounds of funding and the startup will not receive all the money at once.
A startup will usually start with a seed-round (very small amount), then go to Series A (larger amount), Series B, and so on. It is common to find startups that have gone through multiple rounds of funding. Some startups even have pre-seed rounds. The amount of funding per round is usually bigger than the previous one.
Within each round, there is usually a lead investor that will help the startup with investing their money and helping the company get to the next round.
Let’s take a look at the most common funding rounds and how much money is usually invested in each round:
Founder’s Funding/Pre-seed round:
This is the first round of financing. It is usually done by the founders of the startup and is usually a small amount (usually around $10k-$250k). This round is more focused on providing initial funding to get the startup going. The purpose of this round is to cover the initial costs to build a minimum viable product and start testing the market.
This is usually the second round of financing, after the founder’s funding. Seed rounds are usually between $500K-$1.5 million, which might seem like a lot but in reality it’s not that much when you consider that they have already raised money from their own pockets. The purpose of this round is generally to continue developing their product and start with customer validation (i.e., start getting customers, revenue, etc.)
This is the third round of financing for a startup and usually happens between $2 million-$15 million (depending on different factors). The purpose of Series A is for startups to expand their operations and grow their business so they can reach break-even and generate some profits. The investors expect returns at this stage so they will put pressure on startups to perform well in order to maximize their investment returns. If they don’t see the results they are looking for, they will not invest in the next round.
This is usually the fourth round of financing for a startup and usually happens between $7 million-$10 million. The purpose of Series B is for startups to reach maturity and start generating enough cash to sustain operations. They maywould have already reached break-even at this stage so their goal is to optimize their business model and grow as much as possible.
This is usually the last round of funding and happens between $20 million-$100 million. This is where VCs start demanding a higher return on their investment in order to pay off their debts (i.e., other investments they have made). At this stage, startups will be expected to generate large profits, but that doesn’t mean that there aren’t investors willing to fund them if they are generating enough cash flow and have a good business model (i.e., sustainable). There are still many investors that find value in Series C funding because it allows them to take an active role in the company’s growth. It enables them to make sure that their investment will pay off, rather than just sitting back and collecting their returns.
It’s important to note that the above are just general guidelines. There are startups that have raised more or less funding at each stage (i.e., they have gone through a series B round after raising a series A). The key is to make sure that the amount of money raised at each round of funding is enough to reach their goal.
In addition, there are Bridge rounds that are usually done between rounds of funding to provide the startup with additional capital (i.e., they have burned through their previous round of funding but they still need more money).
Investing in startups can be complicated and it’s important to know what you are getting yourself into before investing.
In some cases, a startup will be raising more capital than they need. In this case, they will divide the round into two or more tranches, each with a different price to reward investors who invest early and take on greater risk.
For example, if a startup raises a $1 million seed round at a pre-money valuation of $4 million, they may decide to follow up the seed round with a $1.5 million tranche at a pre-money valuation of $6.5 million. If the startup has a great set of metrics, they may be able to raise another tranche in the future at a higher valuation.
There are other cases whereby startups decide to oversubscribe a round. In this case, the startup may have a high valuation for whatever reason, and they want to raise capital on a larger pre-money valuation, so they raise more capital than they need.
The reality is that startups which are oversubscribed might be getting ahead of themselves – particularly if it is their first round of funding.
In the best case scenario, it could be the case that the company has a great set of metrics, and investors are desperate to invest.
In the worst case scenario, it could be a sign that the startup is full of over-optimistic founders who are in need of some reality checks.
Always try to look at oversubscribed rounds with a healthy dose of skepticism – especially if it is your first round of funding. If you are lucky enough to have multiple financing rounds, you will undoubtedly face this situation sooner or later.
As an angel investor, the best way to handle oversubscribed rounds is to try to get as much information from the startup about the following points:
What changed since the last round? What is the company’s traction?
How many additional customers or users are they acquiring on a monthly basis? Are they seeing strong unit growth and user growth?
What is their revenue forecast for the next 12-24 months? Are they projecting significant revenue growth over that time horizon? What are their projected revenues for the next 6 months, 3 months, and month?
Are they profitable or close to it in any of those time periods? Are there any expenses that are being deferred until later in order to preserve short-term cash flow and keep the company out of debt – or do they have money left over at each stage of their growth curve. The last question is incredibly important. If a startup has been growing quickly, it is possible that they have enough cash left over from previous rounds and/or a positive cash flow, so they can continue to grow without raising additional capital. If this is happening, you don’t want to be investing in that round. You want to be investing in a round where there are no other investors who are going to dilute your ownership stake, and the company needs additional capital.
These are all questions you want to ask as an angel investor. You should also be asking for proof of the revenue forecast and proof of unit growth, user growth, and other metrics from the startup. Once you have these numbers, you can decide whether or not you want to invest in the round.
If they have a good set of metrics, then it may be worth investing in that oversubscribed round. However, if they don’t have a good set of metrics or if their traction or growth rate isn’t projected to be strong enough to warrant such a high valuation, then it may be better to wait until they raise another round at a lower valuation – if that is an option.
Investing in Startups vs. Investing in the Public Market:
As an investor, you should be aware of the extreme difference between investing in public companies and investing in private companies. Both can be quite lucrative but the amount of risk is very different.
“Technology could be applied in different markets. The only thing we have is to create a good regional network to promote the expansion process for entrepreneurs” – Francisco Coronel
In public markets, you hope to buy a stock at a good price and sell it later for a higher price. You are not concerned with the ups and downs of the company. You are not bound to that company for any period of time, but the investment could be sold in an instant if you choose.
In private markets, you hope to buy at a good price and develop an understanding with the company whether it be through an employee, board of directors or other investors. You hope to sell your shares at some point in time but will not be able to sell them as easily as on Wall Street. In addition, there is no liquidity in private market investments; therefore, should you need cash quickly there is no place for buyers and sellers to meet unless they find each other on their own.
Depending on the deal structure you choose, you could be making a long-term investment in a company but put yourself in a situation where you must wait for your investment to pay off. It’s not uncommon for this to take years, if not decades.
Here are some examples of what I’m talking about.
For example, let’s say you bought shares in Google at their IPO (Initial Public Offering) of $85 a share. Google opened for trading on August 19, 2004, and your shares were worth about $100 a share when you bought them.
Google’s first day of trading was on August 19, 2004 when it opened at $100 a share. You might have heard that you can buy stock on the first day of trading and sell it the next day for a quick profit. Remember, though, that Google was priced at $85 per share when it went public. You could have paid $85 or more per share for your shares if you waited until after the IPO to buy them and then sold them immediately. Therefore, let’s say that you bought 100 shares at $85 per share and decided to hold onto them for some time before selling them. Well, today (10 years later), you could sell those same 100 shares for over $1 million dollars! In fact, this is exactly what happened in 2012 – Google is currently priced above $800 per share!
For a different example, let’s say that you decided to invest in an early stage company, let’s say Facebook. You make an investment of $500,000 and commit to a deal where if the company is sold for $1 billion or more, you will receive a significant portion of the proceeds. In this case, your investment is for a long-term gain and you are not looking for liquidity anytime soon. Let’s say your investment was made in 2004 when Facebook was just starting out and was valued at $250 million. You would have been happy with the 10% ownership stake at that valuation but instead got nothing because the company wasn’t sold until years later for billions of dollars.
In addition to long-term value creation being hard with private companies, there is also no guarantee that an investor will ever get their money back from a private investment. In addition to the uncertainty of success and lack of liquidity in most cases, should an investor need cash they could be forced to sell their shares at a lower price than they paid for them – therefore losing money on their initial investment as well as any additional money spent on operating expenses or other costs that were not recouped through profit sharing or other means.
In contrast, in the public market, there is a liquid market where you can sell your shares at any time. If you decide to sell your shares, there will always be a buyer for them. In addition, you can buy and sell a company’s stock throughout the day. Therefore, if you need to sell some or all of your holdings in Google, no matter how much they are worth at the time and even if there is no buyer for your remaining shares, you could instantly sell all of them on the open market. There would be no delay in getting your cash back with this type of investment!
Finally, when an investor invests in a company in private markets they do not have voting rights for that company. Often there is one vote per share owned; therefore, if an investor has 10% ownership then they have one vote while someone with 1% ownership has one vote as well. This can leave an investor feeling “powerless” when decisions must be made or investments are being made by the management team who may not value long-term stakeholders as much as short-term gains from investors looking to flip their shares quickly or move on after making some money. In contrast, public companies have a much more democratic process with voting rights and all shareholders having a say in how the company will be run.
These are just a few examples of some of the differences between public and private market investing. There are many other nuances to the differences that I won’t get into here; however, it is important for you to understand these fundamental differences before getting too deep into private market investments.
If you want to take on more risk in order to potentially receive higher returns or if you have the time and money needed to wait for those returns, then investing in private markets could be the right path for you. However, if you are looking for a good return on your investment but want liquidity and voting rights with your investment then public markets may be a better fit for you.
Return multiples available
As an angel investor, you need to know what multiples are. With any investment, you want to make sure you can get your money back at least. If you believe in the company and plan to hold your investment for a long time, then different multiples will be available to you.
Given that angel investors invest in private companies, the average expected return multiples are higher than public company multiples in most cases.
If the startup is a promising business that the investors can sell after some time for a profit, then you can expect something from 5x to 10x your investment on average. If the startup manages to raise a lot of capital, then the return multiples will be higher.
It is important to note that the multiples depend on the stage of the startup and quality of the management team. For example, the earlier you invest in a company, the higher will be the likely return you can expect.
Here are the average return multiples for the different funding rounds (these are the multiples to the next round if the company is successfully funded):
During the pre-seed stage, the company should have a great idea and a potential market. If you invest during this time, your return on investment will be awesome.
During the seed stage, the company should have a working prototype and a market validation. If you invest in such startups, you can expect to get four times your investment back when it is sold or goes public.
Series A: 3x-4x
During Series A, the company should have a product that has gone through validation and might be looking to expand its market share.
Series B: 2x-3x
The Series B companies should have a product that is already in the market and has established itself. Investors can expect to get twice or three times their investment back during this stage.
Series C: 1x-2x
During Series C, the company should have a product that is already in the market and has established itself. Investors can expect to get twice or three times their investment back during this stage.
During the IPO, the company can expect to return your investment at least twice.
Cumulative Return: 30X-100X
The cumulative return is the total value of all your investments in startups over time. In this case, you can get up to 100 times your investment back.
Overall average: 4x
The overall average return on investment is 4x, which is quite impressive. The initial investment is high, but the return will be good.
How to establish a valuation at an early stage startup
Without a track record, there is no way to know how much a company is worth. Sure, you can put a valuation on the company based on the number of users, or the number of customers – but that will not be an accurate valuation.
You will never be able to know the true value until you have sold the company or exit for more than $100 million dollars. Yes, it is possible that in five years your company could be worth $10 million dollars and you could sell it for $100. But don’t count on it. Even if you have brought in $2 million in revenue from your customers, that doesn’t mean your company is worth $2 million – because it isn’t.
The best way to figure out how much a startup is worth as an angel investor:
In order to figure out how much money a startup is worth, you need to know two things:
- What is the other valuation of startups in the same sector?
Having a benchmark of what other similar companies are worth is the best way to determine the value of your own startup.
The problem with finding a benchmark for your startup is that there are no other startups in your sector doing exactly what you are doing. So, you need to look at similar startups in different sectors and use a benchmark.
The best way to do this is to find out what similar companies have raised money at different stages, and compare the valuations of those companies to your own.
You can do this by using AngelList, CrunchBase, or just Google the company and search for “Series A”, “$8 Million Series B” etc.
This is a similar process to what professional investors use when they value companies at later stage rounds of funding where there are other competitors in the same sector. It is much more common to do this with later stage valuations than at an early stage.
- Revenue Multiple
The other method for valuing startups is to look at how much revenue the company is generating and then adding a multiple on top of that based on the stage of funding.
The problem with this method is that it can be very misleading. This is because it doesn’t take into account how much money is needed to fund the company, nor does it account for the cost of acquiring customers, nor does it take into account the profit margin of the product.
For example, if you were to look at a company that has generated $500,000 in revenue with a 1 million dollar valuation, you might be tempted to say “Wow! A $1 million valuation on $500k in revenue – this company must be worth a lot!”
But that is not entirely true. If you look at the details of this company, you would see that they have a long runway ahead of them and they are going to need capital to grow their business. You would also see that they are charging 5-10% margins on their products (which is very low) so all of their revenue is being spent on running the business and there isn’t much left over for profits. That means that they aren’t really profitable yet. So when an investor looks at this company and sees a valuation of $10 million dollars, he is not only looking at how much money was raised during the round, but he is also looking at how much money will be needed to run the company in the future.
When you are valuing a startup, you want to look at the revenue multiple and then add whatever profit margin is required to cover the cost of running the company.
There is no exact formula for this, but it can be calculated with the revenue multiple. If we were to use this formula for our example above, we would see that even though they have $500k in revenue, if you take away their cost of acquisition and operating costs (probably around 15% of revenue) there isn’t much left over. So when an investor looks at this company and sees that they are profitable on $500k in revenue – they are not only looking at how much money was raised during the round, but also how much money will be needed to run the company in the future.
You can use this method when you are valuing a startup, but you need to know a few things:
- There is no exact formula for this. You have to use your own judgment based on your knowledge of how many customers it takes to generate $1 million dollars in revenue and what percentage of that revenue is needed to run the company.
- You have to look at what the startup has done so far and predict where they are headed. If you think this company is going to keep growing at the same rate, you might not need to add a profit margin. However if you think the company will need to hire another employee and rent space, you will need to factor that into your valuation.
- If the startup has already raised funding at a high valuation, don’t use the same formula again when valuing your investment. You will have to value it based on the revenue multiple and then add whatever profit margin is required to cover the cost of running the company.
- If there are no other similar companies in your sector, use similar companies in different sectors and calculate a multiple based on their revenue or profit – whichever one is higher.
The startup culture (the people, the places, the lingo) is a unique and specialized culture that’s unlike any other. Unlike many other cultures, it doesn’t have its own language or actions. Instead, it borrows from other cultures, like business, the arts, and entertainment.
This is important for you as an angel investor to understand because you need to know how the founders and the team in the startup culture think and act. This will give you an edge in identifying and evaluating startups that can be successful.
Think of the startup culture as a new language. It’s different from business, the arts, and entertainment, and it takes some time to learn. But it’s important to learn about this culture. Understanding it will help you better understand the founders and team members of the startup culture.
Startup culture in the founder’s head:
Founder’s have a unique way of thinking about startups, their company, and their own role in it. The founder’s startup culture is a part of that thinking.
In order to identify and evaluate startups, you have to know how the founders think and why they think that way.
Founders think about startups differently than others do. This is because they’re motivated by different things. They think about their startup differently because they like to imagine themselves as a successful entrepreneur, or they wouldn’t have started a startup.
This can make it hard to understand them and their startup. But it also gives you an edge in identifying and evaluating startups that can be successful. You need to understand the founder’s startup culture because it will influence how he thinks about his company and his own role in it.
Because founders are motivated by success, it is important for you as an angel investor to understand what success means to the founder. This will give you an edge in identifying and evaluating startups that can be successful.
Founders value their startup differently than others do:
The founders of a startup are more likely than others to value their company when compared with other people in other industries see their own companies: they don’t view them as something that will generate revenue right away or be sold at some point in the future for a lot of money; instead, they view them as a life-long project.
The founder’s startup culture:
Startup culture is the way that founders think about themselves and their startups. It’s made up of three elements: their motivations, their values, and the way they think about their company. The startup culture influences every decision they make as they build their company. In order to identify and evaluate startups, you have to know how the founders think about themselves and their companies because this will give you an edge in identifying and evaluating startups that can be successful. You must learn how the founders think about what success means to them, as well as when they expect to achieve it, in order to evaluate a startup correctly.
Startup culture is important because it’s a part of the founder’s personal culture (the mindset of each founder). Founders tend to have a special mindset; one that is different from others who work in other industries. This mindset affects how they go about building a successful company, even though it may seem like they are doing things on purpose instead of by accident. The founder’s startup culture can give you an edge in identifying and evaluating startups that can be successful.
How can the startup culture be characterized?
Every founder has his or her own startup culture. It’s a unique and specialized culture, but because it builds from the same sources as other cultures (like business, the arts, and entertainment), it borrows from them in some ways.
The startup culture is different from business culture in that it doesn’t have its own language or actions; instead, it borrows from other cultures.
The startup culture is different from the arts and entertainment culture in that startups don’t attract or repel people based on your interests in those cultures. Instead, they attract or repel you based on your interests in startups.
Other characteristics can be the way that startups attract or repel people. For example, startups are more likely to attract people who like risk and seeing the world change. They’re also more likely to repel people who don’t like risk and want things to stay the same.
The startup culture can be characterized by founders’ motivations, values, and the way they think about their company. The founder’s startup culture influences every decision they make as they build their company.
In addition, the physical environment is usually flexible and informal. This is because most early-stage startups can’t afford to have a physical environment that doesn’t reflect their values and the way they think about their company.
The startup ecosystem has its own language, and it’s important to be familiar with it when you are engaged in angel investing. In order to be an angel investor, you should understand the terms and definitions below:
Ramen profitability means that a company breaks even and pays for the founders’ (and maybe their friends’) lunches. This originated from the ramen noodles that the founders eat when their startup is just getting started.
MVP or minimum viable product is the initial version of a product. It is bare bones, and it can be used to test a hypothesis.
Pivots are changes made to the fundamental idea of a product in order to achieve success. One of the most common pivots is from an app to a web service or vice versa.
Lean refers to the lean startup methodology developed by Eric Ries in his book The Lean Startup. In this methodology, startups use all available resources to test their ideas. They only develop products that have been tested and proven to work, and they only hire employees when needed. This saves both time and money, allowing startups to succeed faster than ever before.
Validation means that you have a product that meets your customers’ needs. If your customers want and need your product, they will pay you for it. This is a great validation point for startup founders because it means that there is enough demand for their product.
Accelerators are companies that provide space, mentorship, and resources to startup founders. They’re often located in the startup ecosystem of a large city. There is a big difference between accelerators and incubators. Accelerators are more focused on taking ideas to market by providing mentorship, funding, and other resources. In return, they receive equity in the startups they help.
The biggest difference between accelerators and incubators is that the former takes equity in startups while the latter does not. Incubators provide mentorships but don’t typically give funding or other significant resources to startups. They also don’t really take an active role in startups or make specific demands of them—they just provide a great place for startups to get started with room for growth and expansion as needed.
Bootstrapping a startup means that the founders use their own money to fund the idea. They work on their idea every day and use the money they make to pay for it. This can last for years, but eventually most successful startups need outside funding to grow.
Burn rate refers to how much a business spends each month, and it is usually expressed as a percentage of how much it makes. A high burn rate will quickly drain the startup’s bank account or funding from investors.
The SAFE note is a popular way for startups to obtain funding. It stands for “safe, affordable, flexible, and easy” and describes the terms of the note.
An exit is when a company is sold or goes public. It’s the end of the startup phase and usually happens when the startup has reached a certain level of success.
These are just some of the most common terms and definitions in the startup world. There are many other terms that apply to startups and angel investing. It’s important to understand these concepts so that you can make better decisions about your investments.
“What I really understood was that founders really needed people that really talked their same language. And, that’s where I felt compelled to put the knowledge and whatever I was seeing out there to really” – Alejandro Cremades
Biggest pitfalls: why startups fail
There are a number of reasons why startups fail. The most common is poor execution. Sometimes it’s because the market doesn’t exist or the founders don’t know how to sell their product or service. In other cases, the idea is great but it just takes too long to get to market. Or, the market changes and they are not able to pivot quickly enough. Other times, they sell products that aren’t profitable and they run out of money before they succeed.
Here are some of the top reasons why startups fail:
- No market need or demand
This is by far the biggest reason why startups fail. It’s also the easiest to avoid. Ideally, you want to invest in something that is solving a pressing problem for a large group of people and that it’s solving it better than the current solutions on the market. If you can’t answer yes to both questions, then you should consider looking for another investment opportunity.
- Poor execution
This is number two on the list because it’s usually more manageable than missing a big market need or opportunity. Poor execution covers a whole host of sins from poor product design and development, being unable to sell your product or service, not have enough capital, etc. Sometimes businesses execute perfectly but they are just too early for their market and the timing isn’t right yet. Unfortunately, timing is pretty much impossible to predict before jumping in head first so this one can be tough to avoid without investing a huge amount of money in market research upfront – which I don’t recommend doing.
- Inability to pivot / adapt quickly enough
This goes along with being too early for your market or having poor execution but instead of missing the timing completely, you’ve gone into your business knowing that customers want things done a different way but are unable to pivot quickly enough to stay ahead of the market. For example, you open a restaurant that serves a menu of one-of-a-kind, exotic foods but two months in, you realize that your customers prefer to eat the way they do at home instead of trying new foods. That’s when you need to pivot quickly and change your offerings and it’s also part of what makes this so tough. If it takes too long to get things done or change direction then the market has already moved on and you’re left in the dust.
- Poor product / service / business model
This happens when the market wants something for a certain price but you’re selling it for less or giving it away for free. It also happens when you have a great product or service but there isn’t enough demand and no way to make a profit so you run out of money and can’t raise more without pivoting either business model or product/service offering.
- Lack of capital / running out of money before succeeding
This is when startups run out of cash before they can succeed at achieving their goals – whether that’s getting profitable, raising more capital, finding more customers, etc. Sometimes this is because they are selling a product that isn’t profitable or they are scaling their business too quickly and need more money to survive. Sometimes it’s because the founders spent the company’s capital on unnecessary things instead of spending it on marketing or product development. Sometimes they just aren’t selling enough product and can’t raise more capital without pivoting. This is also why it’s important to know what your runway is and how long you can survive before going out of business.
“I think that to really be helpful and to really understand the deal making side of things, at the early stage of companies, you really need that background operational expertise” -Alejandro Cremades
- Poor timing
This is related to execution but goes beyond just being too early for your market. It’s when your market is ready for what you’re offering but your business isn’t ready yet or you don’t have enough capital to get started or grow fast enough to meet customer demand. Another way this happens is if you’re trying to do something that hasn’t been done before and you need more time than normal for customers to catch up with your way of doing things or figure out how they want it done instead of the way they’ve been doing it for years. This usually happens when someone has a great idea but hasn’t spent as much time learning about their market as they should have before starting their business, so they haven’t figured out how their customers like to do business yet.
“The way that you raise money today is going to impact the way that you can raise money tomorrow”- Alejandro Cremades
Section Four – Evaluating Startups
In this chapter, we will explore the evaluation criteria for startup companies that an investor is looking to invest in. This is a very important exercise as it will shape how we approach the investment decision process.
There are many different ways to look at this topic, and I’ve chosen to focus on only one of them here. The approach I’ll be using is based on the idea of a “rational investor” who applies a certain methodology to make investment decisions.
The reason for focusing on this approach is that it tends to be more effective in the long run than other approaches. Why? Because it enables the investor to be consistent in his approach from deal to deal, and therefore allows him to develop a methodology that makes sense.
We will discuss what you should look for when evaluating a startup, how to perform due diligence, and how you should present your findings to the entrepreneur of the company.
Screening the deals
The first step in the investing process is to screen through the deals that are available. Most angel investors use AngelList or Crunchbase for screening. If you don’t see any investments you like, ask your friends or family if they know of any up and coming startups that need money.
“It is very important for an angel investor to consider different aspects of the potentiality of different investments according to the basics of an investment thesis” – Francisco Coronel
If you are going to invest in a startup, it is important to know why the founder started their business. The more passion and drive the founder has for their business, the more likely it will succeed.
Once when you have shortlisted and identified the startups you are going to invest in, the next step is to meet the founder. The first meeting should be a get-to-know-you session; there will be plenty of time for serious discussions later on.
Here are the things to look out for when screening the startups:
- Is the founder passionate about their business?
This is perhaps the most important question to ask. Can the founder speak passionately and articulately about their business? Do they tell a good story? This is crucial.
This is not to say that you should judge the founder by how well they speak. After all, you don’t expect the founder to be an expert in public speaking. However, if they are unable to tell a good story about their business, then it is a clear indicator that they don’t really believe in what they are doing.
If a founder cannot convince you of why the business will succeed, then you need to move on. What makes sense to them might not make sense to you; however, if you don’t get any positive vibes from them, then it probably isn’t worth your time and money.
- Can the founder describe how they will make money?
Every startup has to make money at some point or another in its lifetime; otherwise, what’s the point of starting it? If a founder has no idea how their startup is going to monetize, then it probably isn’t worth your time and money. The last thing you want is a high-cost startup with no obvious source of revenue.
“I think the winners far outnumber the losers and the dream of all of us is to be into companies that become unicorns or bigger” – Dan Scheinman
- Can the founder describe the product?
The product is the most important part of every startup. The more effort and time the founder has put into developing their product, the more likely it is that their startup will succeed. If they have a mockup of their product, or if they can demo it for you, then that is even better.
Most startups don’t have a fully functional product when they start looking for funding; however, if they have access to some sort of prototype, then that’s good enough for you to get an idea (however rough) about how the product looks and works. If the founder cannot describe how their product works even after spending some time with them, then move on to the next one. There are too many great startups out there waiting to be funded; don’t waste your time and money on a startup that isn’t worth your attention.
- Is the founder transparent in their dealings?
If the founder is not transparent in their dealings, then you should be skeptical about investing in their business. When you are looking to invest in a startup, you expect the founder to be open and honest about their business.
This doesn’t mean you should take everything they say at face value; however, if they start making excuses for why things aren’t working out or if they lie about how much money they have spent on development, then it is probably best to move on. You need to trust your gut when it comes to your investment decisions, and if your gut tells you that something is amiss with the founder’s dealings, then don’t invest in that startup.
Evaluating pitch decks
The main document that startups use to present themselves to investors is the pitch deck. A slide deck is a presentation with slides that have text, images, video clips and other graphical representations of data. Most pitch decks are made using PowerPoint, but other presentation software can be used as well.
The most important thing to do when evaluating a startup’s pitch deck is to take your time and go through each slide carefully. As you read each slide you should ask yourself: Are the points being made clear? Are the numbers believable? Is the startup addressing an interesting market? Does it seem like there’s a clear path from here to success?
If you don’t know anything about investing in startups or don’t have any kind of background in finance or economics then my first piece of advice for you when looking at a pitch deck is not to think about how much money you would need to make in order to get your return on investment back (your ROI). Instead, think about whether this investment aligns with your personal values and whether it would give you personally some kind of satisfaction or sense of accomplishment if it did well. Angel investing is more than just making money; it should be fun! If it’s not fun, then you should find something else to do with your time.
The most important thing to remember when evaluating a startup’s pitch deck is to take your time and go through each slide carefully.
While you’re going through the pitch deck, make notes of anything that stood out to you either positively or negatively on a particular slide. Then when you’ve finished looking at the slide deck, go back through it and make another pass through your notes. This will allow you to see both positive and negative things in context with one another. It will also help you avoid making any decisions based on just one or two specific slides without looking at the whole pitch deck as a whole. This process is critical for basic due diligence because it forces you to evaluate all of the information in context with other information instead of taking any one piece as an isolated data point that might be misleading by itself.
“A lot of angels will not have an option to follow up. So it’s extremely important that you stay in touch with that founder throughout their journey, good or bad” -Laurel Touby
When evaluating a startup’s pitch deck there are three main areas of focus that we look for:
This is the most important part of any pitch deck and is where you’re going to get a lot of information about whether or not the startup can survive and achieve success.
The financials in a pitch deck are usually broken down into three sections: The market opportunity, the startup’s value proposition, and the startup’s business model. The market opportunity is how much money is being spent by consumers on whatever problem the startup is solving. The startup’s value proposition is how much value its product or service offers compared to everything else in the market. And finally, the business model is where you’ll get detailed information about how exactly the startup plans to make money from offering its product or service for this particular market opportunity.
There are a number of different ways that startups can make money offering their product or service for a given market opportunity, but there are five main business models that most startups use: subscription services, marketplace businesses, platforms for third-party services, freemium services, and service businesses.
The team section of a pitch deck is where you’ll find a lot of the information about the people behind the startup and how capable they are.
The first thing that you should look for is whether or not the founders have relevant experience. If they don’t, then you should ask yourself whether or not they’ve had any relevant work experience in an area that has any similarities with what they’re currently trying to do. The second thing you should look for is what kind of other companies or projects the founders have worked on in the past. You want to see some kind of consistency here because it shows that their past experiences have given them some kind of expertise that will help them make their current startup successful. The third thing is how many employees the startup currently has and how many employees it hopes to have in the future. This will give you some information about how serious and competent this particular group of people is compared to other groups. Finally, look into each founder’s personal background and try to get a sense for what their personalities are like. Are they easygoing? How good are they at working with others? Do they work well under pressure? These kinds of things might seem silly, but they can have a big impact on a startup’s success.
We take the same concept of community and of connecting people and we apply it to our investing. And so I stayed in touch with many of those media people and added more media people to my network” – Laurel Touby
The third section of the pitch deck is where you’ll find the information about the startup’s product or service. This is where you will get a lot of data about how well it’s designed and how much potential it has to be successful.
When looking at a product or service in a pitch deck there are four things that you should be looking for: What problem is it looking to solve? What value does it offer compared to its competition? How is it better than its competition? And finally, how will the startup make money with this product or service? In order to understand each of these things, you need to ask lots of questions and do some independent research on your own as well. You shouldn’t just take what the founders say at face value; you should look into the answers for yourself as objectively as possible.
Like any other kind of investing, angel investing requires time and effort in order to avoid making mistakes and maximize your chances for success. But if you do put in the time and effort, then there are plenty of great companies waiting for you to invest in. They might not be as glamorous as the companies that are featured on Shark Tank, but they’re just as real and just as exciting!
Non disclosure agreements
When screening companies for angel investing, you may come across startup founders who are unwilling to show you their business plan or pitch deck, unless you sign a non-disclosure agreement (NDA). The purpose of this agreement is to protect the startup company from competitors or other companies stealing their ideas.
It is true that it is important for any company to protect their idea, but there are other ways of doing this. For example, the founders could ask you not to share the information with anyone else, or they could send it to you in a secured email.
Since non-disclosure agreements are rarely used in real life, they are a warning sign that the company is too early to be involved with an angel investor. Apart from the fact that there is no valid reason to sign one, you should be aware that an NDA will limit your ability to talk about the company with anyone, including your fellow investor syndicates or your own network.
In addition, non-disclosure agreements may limit your investment options in the future. If you want to invest in a company that has a competitor with a non-disclosure agreement, your only option will be to invest in the competitor. This might not be a problem if you have confidence in the startup and their ability to win against their competitor. However, given that you are investing as an angel investor, it is unlikely that you will have the experience or knowledge to make this decision.
The only exception is when the startup is a deep technology company, such as a medical device. There is a good reason to protect this type of company and their intellectual property from competitors. However, they are very rare and usually require specialized knowledge to evaluate properly.
How to prepare for pitch meetings
The first thing that we need to do is to get organized. We need to have a good understanding of what we want and how much cash we can deploy. We should also have a good understanding of the different types of deals that we are willing to invest in. This is an important part of our preparation as we are going to be facing several pitch meetings in the coming weeks and months.
“The reality is that some people try and mimic what they do. But the odds of success choosing the same space as they choose, and going after their process, their expertise, and their talent is really low” – Dan Scheinman
Here are some of the steps that you can take to prepare for pitch meetings.
- Prepare the purpose of your meeting with the company:
The purpose of the meeting is to determine whether a company is a good fit for us or not. We want to determine whether we should invest in the company or not.
This step is important as it will set the agenda and frame your questions. The agenda will determine the type of information that you are going to get from the meeting. If you have a clear idea about the purpose of your meeting, you will be able to formulate the right questions.
- Prepare the right questions:
The right questions will help you gain a good understanding of the opportunity that is being presented to you. It will also help you get a better sense of the company’s strengths and weaknesses. In addition to the financials, you should have some questions about the business model, market opportunity, team and management.
This step is very important because we want to understand what the company is all about. If we answer our questions clearly, we can make an informed decision.
Here are some sample questions that will help you make an informed decision about whether this is a good company or not.
What are you doing? What are your products and services? How does it work? Who are your customers? Where do you sell your products or services? How do you make money? What are your revenues? How many customers do you have? Where is your business located? – location of the product or service, location of the customers, location of the team members. Does the company have a patent or other intellectual property? What are its growth rates? Has it been profitable in the past? Profit and loss statement. Who are your competitors? How big is the market that you are targeting?
- Scrutinize the company’s financials before the pitch:
Given that a typical investment pitch lasts about 18 minutes, it is important that we come prepared. One of the things that we can do before the meeting is to scrutinize the financials of the company. This will help to ensure that we have a good understanding of the company’s past performance and future prospects.
A good way to do this is to see whether there are any red flags in the financials. For example, if a company has been profitable in the past, but loses money in its most recent year, there is something wrong with it. If there are any red flags in the financials, you should try to get an explanation from the management.
- Understand your deal preferences:
Once you have a good understanding of what kind of companies you want to invest in, you should go through your deal preferences and choose those types of companies that meet your criteria. There are several factors that determine which types of deals you should invest in. The most important factors are the market size and the team.
For example, if you want to invest in a company that sells products to consumers, you are likely to choose a company that has a consumer base of at least 100,000 people. Similarly, if you want to invest in an internet business, you should look for companies that have at least 500k paying customers.
The other factor is the team and the management. You should be able to trust the management and believe that they have what it takes to succeed as entrepreneurs. The management team should also have relevant experience in their respective fields. The company must also have an experienced CTO or CMO who can help them grow their business. If you find a good startup with a great market opportunity and a strong management team, it will be easier for you to decide whether there is any value in investing in the company or not.
How to perform due diligence
Due diligence involves many factors and there is no “one” correct way to do it. It varies among the different startups and sectors that you are evaluating. Most important factor in due diligence is to be unbiased and resist the temptation to get emotionally involved.
“I think selection is the art of going out and finding someone that you want to invest in. And due diligence is, from my perspective, often the art of messing that up” – David Cohen
The process of due diligence can be divided into 3 main parts:
1) Pre-planning: This involves knowing what you are looking for. For example, you have identified a startup that you would like to invest in, but before investing in it, you will want to know if it’s worth investing your money. This pre-planning involves research on the sector, competitive landscape, target market, customer insights, industry trends etc. In most cases this research may lead you to conclude that the startup isn’t worth investing on at all or there may be some areas where investment makes sense.
2) Due diligence: This is where you will perform all your checks on the startup and try to find all relevant information about the company (its financial standing, reputation of management team, any legal issues etc). The aim here is not just to find out whether or not there are any issues with the company but also understand what the issues are and how big they are.
3) Post-planning: This is where you will decide if investing in the company makes sense or not. You will also plan for what you will do after investing in that company. This involves planning for exit, raising more money, product development etc.
The process of due diligence can be very time consuming and you may have to spend weeks or months on it if you want it to be thorough. This isn’t a bad thing as long as it is worth the time and effort put into it.
In this section we will be discussing the due diligence process in detail by looking at some of the most important aspects of investment due diligence. These include: company and sector research, legal issues evaluation, financial analysis etc. Let’s take a look at each of them now:
Company and Sector Research: In this stage of due diligence you will be doing research on the company’s business model, market position etc. You should look at its current standing as well as its future plans for growth (if any). As an investor who does not work with the startup directly, your goal here is to find out whether or not the startup is worth investing in and if so, how much to invest.
You should also evaluate the market position of the company and its competitors. This can be done by looking at how the market is segmented, how big each segment is and what are the competitors doing in terms of marketing, pricing etc. You should also look at what opportunities exist in that market for new entrants.
Legal Issues Evaluation: When evaluating a startup you should check whether or not there are any legal issues that could come up in future. For example, if you are evaluating a startup that has filed patents previously then you should evaluate whether those patents are still valid or not (in case they have been challenged). If they have been challenged then it is important to evaluate why it has happened. It may be because the patents were invalid or it may be due to a patent war where an existing company is blocking new entrants into the market (this happens often).
In most cases legal issues can be resolved without having to spend any money but it’s important to do your research here as well so that you don’t get caught unawares in future. There are some other legal issues as well which you need to research about but in most cases it involves looking at financing, intellectual property etc.
Financial Analysis: This is probably the most important part of due diligence and where you will spend a lot of time on. At this stage you will be doing all sorts of financial analysis to check if the startup can generate enough cash to sustain itself in the long run or not. You will also be evaluating financial projections and forecasts which will help you to decide whether you want to invest or not.
You can evaluate financial projections based on historical data on product sales as well as cash flow reports. You may want to evaluate the quality of financial data by using some ratios (like return on assets and equity). These ratios are also useful for comparing your own company with a competitor company.
If you are evaluating several startups then you should plan everything beforehand so that you don’t have to do unnecessary work (and waste your time). You should have a list of questions that you want to ask about the startup and how much time you want to spend on each question. Also make sure that all your questions are clearly defined beforehand so that there is no confusion later on.
Are financial models important?
Given that most early-stage startups have yet to generate significant income, it may seem odd to ask about financial models. But, if you are going to invest in a startup you need to know two things:
- How will the company make money?
- How much money will they make and how soon?
- Will they achieve the goals they’ve set for themselves?
If the founders can’t answer these questions, then you shouldn’t invest. If they can’t answer these questions convincingly, then you shouldn’t invest.
Most of the well-known financial models such as ROCE, IRR, NPV, etc. are not appropriate for early-stage startups. They are useful in evaluating mature businesses that have a history of profitability and know what they expect to earn over the next several years.
But for early-stage startups, investors need a different kind of financial model. It’s called an equity model. The goal of the equity model is to show how much money the company will make and when they will make it in a way that makes sense for early-stage startups, i.e., without having a history of actual results to draw upon for guidance.
The equity model is based on two things:
The assumptions that the founders use to project their future performance; and The mathematical model that they use to project what those assumptions will lead to.
With an equity model, the goal is not to arrive at a precise number for projected revenue and profit. Rather, the goal is to show that the assumptions and inputs used by the founders are well-reasoned so that you can evaluate whether you believe them and whether they make sense for your investment thesis.
You should never invest in a company without seeing an equity model. If you can’t get one from them, then it’s a big red flag that you need to take into consideration before making your investment decision.
How to evaluate a winning founder
When it comes to finding a company to invest in, you must find a great founder. The first job of the founder is to create something that other people want. The second job of the founder is to raise money from investors or customers. There are probably hundreds of thousands of things that people want, but if you can’t sell them the product or service then it’s probably not worth investing in.
“I believe that in this business, where you’re competing against all sorts of funds, you’re competing against all sorts of other angels, you have to have a differentiated strategy to find the bigger winners” – Dan Scheinman
Here are some of the traits of a great founder.
- Great founders have a “product sense”
A great founder can tell you what’s wrong with an existing product. They can explain how their product is superior. And they can tell you how it will be better than everything else that’s on the market. If you ask a great founder why your product will succeed and they say, “I don’t know, I just like it.” Then I wouldn’t invest in that company.
- Great founders have a “market sense”
A great founder can tell you who their competitors are and where they are going wrong. They can also tell you who their customers are going to be and why they will buy your product even though there are cheaper alternatives available to them. If a founder says, “We just know we can do this better than our competitors and our customers will come because we have the best solution on the market,” then that would make me nervous for my investment because there may be no real plan for getting customers.
- Great founders have a “people sense”
A great founder can tell you what they are going to do with each employee and how they will get certain tasks done before they start. If the founder cannot explain in detail what their hiring and training plans are, then you should be cautious. If the founder says, “We’re going to have a great team because we’re going to hire all our friends who will work for free, and once we get funding we’ll be able to pay them,” then I would probably steer clear. Great founders understand that great hires are the most important thing when it comes to building a successful company.
“It’s about the community and coming together with the right skills at the right time for the right startups” – David Cohen
- Great founders have a “plan sense”
A great founder can explain not only how they are going to achieve their goals, but also why those goals are achievable and what is likely to happen if they fail. If the plan seems too simple or if there is no risk of failure then I would be wary because plans that don’t allow for mistakes seem too good to be true.
These are just some of the things that we look for when evaluating a great founder. But there are many more including passion, honesty, integrity, intelligence, and humility to name a few.
However, it is difficult to judge these traits by just talking to a founder. You need to spend a lot of time with them and watch them work. A great founder can convince you to invest with just one meeting. However, to make sure that you are investing in a winner you have to spend months or even years working with the founder before you decide on an investment.
The best way to get to know a founder is to be a customer or client. If you’re not a customer or client then the next best way to find out about the founder is to meet him or her at investor pitch meetings, tech conferences, and startup events. You can also read articles written about them and watch videos of their presentations.
Top questions to ask yourself about the deal
After you have looked at the entrepreneur and been introduced to the idea, you need to evaluate the opportunity. Here are a few things to consider:
- Is the team right?
Even if the idea isn’t that good, but the team is great, that’s a reason you would want to invest. If the idea is truly great and the team isn’t so great, that’s still a reason you may not want to invest. This is because it will be harder for the team to execute on the idea. Great teams who are more adept and familiar with the market can execute faster.
In addition, if the team is capable and talented, they will be able to make pivots to the business and continue to grow if necessary.
When you are looking at the team, you need to look at the following:
- Does the team have a history of successful ventures? Do they have a track record for creating something from nothing? Do they have a track record of growing something from small to large? Or, do they have a track record of mismanaging or running a business into the ground?
- What is the team’s skill set? Are they relevant to this business? Do they have the ability to execute on this business? Is their skill set relevant to what you see as the needs of the business?
- How many people are in the team? It is better to have a small number of people with complementary skills than it is to have too many people who don’t know each other and don’t really know how to work together. A small team can be combined with additional members if necessary, but a large team makes it harder to manage overall.
- Is there a big market for this idea?
You want to make sure that there is enough money in the market for this idea that you can get a return on your investment. If there are tens of millions of potential customers, then that makes it easier for you because if you can capture one percent of that market, then you will be able to get a good return on your investment. However, if there are only hundreds or thousands of potential customers, then that makes it harder because even capturing one percent of the market is not going to give you enough money to get a good return.
- Is this idea original and defensible?
If there are existing companies with similar products or services, then you want to make sure that there is enough value in the idea that those existing companies cannot easily just copy it. If you have a unique and proprietary idea, then it makes it harder for others to just copy it and steal your business. If you are an entrepreneur and you are launching into a space that has already been occupied by others, then make sure that they do not have the advantage of history or scale while you do not have either of these advantages. Make sure that your idea can stand on its own merit, even if someone else will see how valuable it could be.
When evaluating whether this idea is defensible, look at:
- Is this a new concept? Does it do something different than what is already being done? Does it improve upon what is already being done in some way? Or does this just cut into something else that already exists? A new concept will make it harder for someone else to steal your business because they will have to recreate the wheel all over again, while your business will be ahead of the curve because it will already have what they are trying to create.
- Is this idea patented? If so, it will be harder for someone else to just copy you and steal your business because you will have a legal defense with your patent.
- Is the idea proprietary? Is there some aspect of what you are doing that is unique and cannot be easily copied? If so, then that makes it harder for someone else to copy your business and steal your market share.
- Does the idea solve a problem that people want solved?
Sometimes people come up with really cool ideas that they think people need, but in reality, no one needs it. No one wants it or wants to pay money for it. You need to be able to look at the entrepreneur’s idea and determine whether other people really want this service or product or if they don’t really care about what is being provided by the business and if they won’t pay anything extra for this service or product if it wasn’t there for them. You need to make sure that people actually do want what is being offered by the startup, otherwise you won’t get any return on your investment.
Here are a few questions to ask yourself when evaluating whether people want or need this idea:
- Is the problem being solved something that people are complaining about, or have they been looking for a solution to? If they are complaining about the problem, then that makes it easier for you to see if people will pay for a solution. However, if no one is complaining about the problem or looking for a solution, then you need to see whether you can create the platform or market for this idea by marketing it yourself through other media and platforms.
- Does the business target a vertical market and do people in this market have money? If so, then that makes it easier for you to evaluate whether people will be willing to pay money for this product or service. However, if your business is targeting a horizontal market like anyone can use your service, then it becomes harder for you because everyone in that horizontal market does not have money and will not be willing to pay anything extra for your service. You want to see whether there is enough wealth in the industry as well as enough demand for your product or service that you can get enough customers who will pay money extra in order to use it.
- Is this a business that people want to be part of because it is cool, or is it a business that people want to be part of because they get value from it? If people don’t want to be part of this business because they get value from it, then you need to figure out how you will be able to make them see the value and want to pay for your product or service.
- Is the price of what you are offering competitive with the competition? If there are other similar products out there that are cheaper than yours, then you need to evaluate whether your product has enough additional features and benefits that make it worth the price premium over the competition. Will people pay more money for your product just because of all its cool features? Or, would they rather save money and use the competition’s product instead?
Top questions for founders
There are a number of questions we like to ask a founder to get a sense of the viability of the business and the product.
Here are our top 5 questions for founders.
- Why are you the best person to build this product?
This is a simple question that is often overlooked. A person’s answer to this will give you a sense of how self-aware of their skills are. Many founders don’t know what their strengths and weaknesses are, so they’re unable to answer this question effectively. If a founder can’t give you a good answer to this question, it means they probably don’t have the right experience or skills required to build their product.
- What do you think about solving the problem?
A founder will usually have an idea on how to solve the problem they are trying to solve. It is important to understand how they think about solving the problem as it will help you understand if they have thought through all aspects of the problem and solution.
“That’s what entrepreneurs do, right? They see a problem and they want to go solve that problem” – David Cohen
- What part of your product are you most excited about?
This is again an indicator as to what motivates them and how passionate they are about what they do. Founders who get excited by different aspects of their product tend to be more successful than founders who only like one part of their product. For example, if a founder loves talking about their product but doesn’t get excited when talking about the engineering challenges, that could be a red flag.
- What is the biggest risk to your business?
This question is actually a bit of a trick question as many founders will think about a few different risks but not all the risks they should be thinking of. It is important to ask this question multiple times and get a sense of what the founder thinks are some of the risks that may impact their business. This will help you understand if they are well prepared for all possible outcomes in the future, or if they are building their business with “blinders” on.
- What is the worst case scenario for your business?
Again, this is a trick question to try and understand what the founder thinks their business might look like in the future. There are many founders who paint a rosy picture of their business that doesn’t align with reality, so you want to be sure you understand what they foresee for their business. This will help you understand if they have an overly optimistic view of their business.