87. Get Angel Investor Dealflow đź’¸
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Once you decide to start angel investing, your first challenge is finding strong dealflow. You need access to a large number of companies looking for funding that meet your general target criteria, because most won’t be worthy of your money.
I have experience on both sides of the table. As a founder, I raised money from angels on numerous occasions. Now I am an angel investor, startup advisor, on the BoD of the North Bay Angels, and involved with several early-stage VC funds.
Let’s look at a few different ways you can source quality startups.
Personal Dealflow
Your first option is to do it yourself. You might already know some promising founders you could contact. Next, you should reach out to your network and ask if they know of suitable candidates. However, that well is likely to run dry.
Fortunately, many founders are actively hunting for angel investors, so you just need to let them know you are interested. Start by updating your LinkedIn headline to mention that you are an Angel Investor. You can also list any specific criteria or a short investment thesis.
Some websites list active angel investors. Sign up at all of the following:
The downside of making this public declaration is the influx of low-quality leads. I get over one thousand contacts each year from founders seeking angel investment. Most of them are crap, but some are genuinely fantastic.
This firehose of deals will teach you a lot about the range of startups out there and help you cultivate an eye for quality.
Investing With Other People
When you work with others, you will discover more deals and have help analyzing them.
The easiest approach is to recruit a group of friends who also want to try angel investing. However, unless they are experienced, they probably won’t bring many more deals or guidance on identifying the best opportunities.
I encourage new angels to join an angel investment group. That was my first move when starting to seriously consider startup investing.
There are thousands of angel groups all over the world. Each has its own preference for companies. They might focus on:
Geography
Sector – Medical, agricultural, gaming, crypto, …
Founder gender/ethnicity
Graduate of a particular university
Type of company – SaaS, hardware, consumer products, deep tech, …
Angel groups are often well-known and easy to find, so many founders seek them out to apply. Angel groups let founders pitch to many potential investors all at once.
There are a few different styles of angel groups. Think about which appeals to you before joining.
In some groups, the angels invest individually. I think of them as dating services. The founder pitches to the whole group, but each member decides on their own whether to invest.
Other groups have a fund. The members vote on which companies to invest in. Then everyone invests in those companies through the fund, even if they voted no.
Either way, being part of a group lets you take advantage of the experience of the other members. They are likely to ask pointed questions you might not think of. They will share their thoughts on the companies. They can also help with due diligence on companies that get interest from the group.
Join Syndicates
Syndicates are a fantastic way of accessing high-quality deals with lower minimum investments.
The syndicate organizer identifies companies of interest and the terms of the deal. As a syndicate member, you have the option, but not the obligation, to invest in any of the startups.
Syndicate leads are usually experienced investors with deep networks and a specific investment thesis. They often have access to deals you could never find on your own and insight into markets that are unfamiliar to you.
Syndicates also allow you to make smaller investments. While the typical minimum angel investment is $25k (and can go way up from there), most syndicates let you invest just $1,000. That allows you to make many more (smaller) investments to spread out your risk.
The downside is you don’t get to do much due diligence on the deals. You are limited to reading the deal memo from the lead and doing research on publicly available information. Also, you typically don’t invest in the company directly but in an SPV (special purpose vehicle). The SPV is a shell company created just to invest in the startup. They do this so the startup’s cap table is not junked up with hundreds of tiny investors. You own part of the SPV, and the SPV owns part of the startup. Practically, it does not make too much difference.
The best-known platform for investment syndicates is AngelList.
Jason Calacanis has an interesting syndicate called (creatively) The Syndicate.
Equity Crowdfunding
Equity crowdfunding is similar to sites like Kickstarted, but rather than being a pre-order, you buy stock in the company (or usually an SPV).
Crowdfunding sites give you access to more companies than you could possibly invest in or even have time to look at. One advantage of crowdfunding is the enormous diversity of investment opportunities. The other is the very low minimum investment. In some cases, you can put in as little as $100.
Deal quality on crowdfunding sites is mixed. Many startups chose this option because they have failed to raise money from angels, syndicates, or pre-seed VC. However, there are some fantastic companies in there too.
The company valuations are often way too high. Unsophisticated investors are often willing to through a few hundred dollars are a business doing something sexy. Because the high valuation seriously hurts my return at exit, I try to avoid these.
Some of the best know equity crowdfunding sites are:
https://Wefunder.com
https://Republic.com
https://Seedinvest.com
https://Fundable.com
https://StartEngine.com
https://MicroVentures.com
One significant advantage of crowdfunding is many deals are open to non-accredited investors.
Most angel investments require that you be either wealthy or sophisticated. This is to protect ordinary investors from getting scammed.
To be accredited, you need to meet at least one of these criteria (in the US):
Individual income over $200k ($300k if filing jointly)
Over $1m in assets, not including your primary residence
Be a licensed broker
Be a general partner, executive officer, or director of the company (you can invest in your own company)
You don’t need to choose between these various paths. I started by joining an angel group to learn what I was doing without getting myself into too much trouble. After a few years, I put myself out there publicly as an angel. In the last few years, I added syndicates to my portfolio. I am just starting to dip a toe in the crowdfunding waters.
And, till next time, ciao!
