Wednesday, July 22, 2020

Secrets Angel Investors Won’t Tell You

Author: Sam Huleatt

I’m going to share some secrets about angel investors — insider tips from years of being both a founder and an angel investor.

Angel investors are very different from institutional, or venture capital investors. Thus your strategy for finding, approaching and winning investment from angels should reflect that.

#1 Not All Angels Are Legit

These days it seems everyone has a Linkedin or Twitter profile mentioning they “angel invest.” Be skeptical; not all angels investors are worth your time. Likewise, never, ever pay money to pitch an angel. As a founder you will need to put in a ton of effort to raise capital, so you also can’t afford to have your time wasted. Look at AngelList, Crunchbase, or the angel’s public portfolio to get an idea of whether they are truly an active angel.

#2 Where Angels Live Matters

Geography matters in the startup world. If you want to raise money from top venture capital firms, having angels who are based in San Francisco or New York City means a higher likelihood the angel is actively networked with top funds in those cities. While not always the case, an angel based in Tulsa is less likely to be helpful making introductions to tier-one funds than an angel living in San Francisco.

#3 Match Your Market To Your Angel

Angels tend to be more emotional or gut-based in investment decisions than institutional capital. Many angels are investing as a hobby because they have passion for entrepreneurship they developed from person experience. Optimize for angels who want to be your partner - not just an investor.

Angels are also typically domain experts with a personal history of success in a specific vertical. This expertise (whether perceived or real!) leads them to think they can generate alpha by investing in other related companies. Example: someone worked at an adtech company that had a successful IPO is more likely to invest in adtech, or adtech adjacent spaces (e..g, enteprise SaaS) as they believe their experience affords a competitive advantage.

In other cases, angels might specifically invest in areas not related to their past experience or skill. Angels often invest in founders as proxies: startups solving problems the angel is passionate about, but not qualified to start as a founder themselves.

Your goal is to apply filters and find angels who specifically want to invest in the market you are going after.

#4 Find Ways To Quickly Build And Hack Trust

The #1 thing most angels are thinking in the first meeting, whether they realize it or not is: can I trust this founder? If an angel doesn't trust you, they inherently don't believe you can create a return on their investment.

Trust for angels is very important: they are taking this biggest early risks being the first money in and using their own capital (not money from LPs). There are have been plenty of times where a founder goes on to make a killing, while the angels are left high and dry. Thus, in addition to selling your vision (again, find a legit angel who cares about your market) you also quickly work to establish trust.

How do you quickly build trust? Create multiple “trust reference points”: Be on time. Follow-up. Preemptively suggest reference calls. Be an open book on accounting. Don’t embellish, or BS. Be authentic - be you. Do what you say you are going to do.

Outside of the obvious, there are plenty of other strategies you can use to try and quickly build rapport and fast forward relationships.

#5 Create FOMO: Meet The Angel’s Friends

You may have read before that the fastest way to expedite or close a round of funding is when you can generate enough urgency that investors feel like they might miss out if they don’t take action now.

Urgency is your goal as a founder. This is why fundraising can seemingly take forever, but then suddenly all happen in an instant. Angels like to feel they are investing with friends, or with other smart money. Thus, your goal is to find closely connected groups of people and then get one to serve as the lead domino. You are more likely to create FOMO, or urgency faster if the angels in your round all know each other. One seeming exception to the rule: AngelList syndicates where angels don’t already know each other. In this situation, the syndicate lead’s entire job is to create FOMO for you.

#6 A Smart $1,000 Is Better Than A Dumb $25,000

This could be a controversial, as at a certain point, founders need enough cash to close the round. $1,000 dollars doesn’t help you close a $750k round. Or does it?

I would argue that in many cases, having a really smart, or well known angel invest a token amount is highly worth it.

I have personally seen angel friends invest $1,000 and then provide more value than many venture funds. Why? How? Angels just like founders want to establish track records. Also, angel investing is expensive! Many angels start out by investing small amounts.

Just like the Keith Rabois concept of talent arbitrage, you can also find new or unproven angels willing to invest small amounts for disproportionate amounts of their time and energy because they want to use you to build their own track record and brand.

Smaller checks can also be a creative way to score a high-profile angel whois on the fence. You could try and make the angel an advisor, but it’s more emanigul when they have true skin-in-the-game. Why not say something like

“Hey XXX, we think you could be a huge value add and we’d really love your involvement. Would you be willing to put in even $1,000 or $2,500?”

Getting that right lead domino into a group of angel investors will help you reach the FOMO tipping point quickly.

#7 Look Out For Angels And They Will Look Out For You

Lastly (and perhaps I’m biased as an angel myself) but don’t piss off your angels! Angels take a disproportionate amount of early risk, especially when compared to institutional investors.

Because angels don’t have the same protections as venture funds, angels often become after-thoughts in later funding rounds. Remember that angels are the ones who believed in you (the jockey), over the idea and traction (more what a VC looks at). This means that as inevitable issues arise over your entrepreneurial journey, angels can be a tremendous resource, acting almost like independent board members (even therapists!). Keep angels on your side from the beginning: offer them pro rata, send your investor updates regularly and let them know when and how to be helpful.

Btw, if you have an amazing idea, I’d love to hear from you.


Network-driven
angel investing

8

Months since inception (Nov 2019)

31

Member-led SPV's and syndicates

150+

Deals discussed or shared