By Tian DuBelko
Early tech startups raising capital will typically attract “angel” investors, or individuals who typically invest between $20,000 and $100,000 per company. And while the success of your startup is largely decided through your own efforts, good angels can prove to be an invaluable resource for your startup during the building process. On the other hand, bad angels can lead to wasted time and make your startup life miserable.
Before we jump into the secrets of impressing and working with angel investors, it’s important that you understand what an angel investor is, and how they are different from venture capitalists (VCs).
Though they can both be great sources of funding, angels differ from VCs in quite a few ways. Usually, VCs invest over $1M, and sometimes over $3M in a company. In recent years, however, the rise of angel investors groups and “super angels” have made some angel investments potentially just as valuable.
According to the Angel Capital Association, “Angels invest their own funds directly in a business, while venture capitalists invest funds from other sources (e.g. pension funds, insurance companies, foundations).”
Essentially, there are two key difference between angels and VCs:
It goes without saying that no two angels are alike. Some prefer to invest in small increments, while others invest up to millions per deal. The types of deals and industries angels invest in depends on the individual and the angel group. In your journey to raising seed capital, you’ll likely run into angels of all shapes and sizes, from newbies to seasoned investors, so you’ll want to be prepared. With how complex raising funds can be, we’ve compiled these 7 things that founders should know when working with angel investors.
Since your startup is likely in its early stages, it makes sense to work with more experienced angels who understand the process and expectations of working together. You don’t want to waste time and energy educating first-time angels on the risks and etiquette of angel investing. It’s also not a founder’s job to explain financial basics to angels, such as how convertible notes work. Taking on these inexperienced investors can lead to misunderstandings and a whole lot of headache. Also, working with seasoned investors can have more than just financial benefits for your company. For example, angels can often offer you insightful advice on your industry and finances, insider knowledge that you can’t get anywhere else.
If your company is gaining traction with investors, focus on getting a few good cornerstone investors to anchor the round. It helps to do your homework ahead of time so you know what your target investors look for in a company and how they invest money. Once you have a couple of anchoring investors, try and fill out the round as quickly as possible with referred investors. Trying to make the “best” decision regarding investors can prove to be a time-consuming task, so it’s better to just make good decisions quickly. Look for deep-pocketed angels who will provide you with the financial infrastructure your company can use to grow.
Just as founders typically have a trail of history with those they’ve worked with, angels too have a past investment portfolio. And since potential angel investors will ask for your past references, you should ask for their references and past portfolio as well. It’s only good due diligence. Over a call or coffee, you can get a good idea from the reference of how fair the investor will be with their expectations and if they will be meddlesome.
If an angel doesn’t offer any references, you can directly reach out to companies in their portfolio. Even if an angel does offer references, it can be useful to message other not included startups. This “off-balance-sheet” reference checking will allow you to get feedback from all kinds of companies that’s worked with the angel, not just the ones that became successful. You are bound to encounter challenges in your company’s journey, and you want to make sure an angel can deal with challenging times before going into business with them.
While looking for savvy investors is an important factor to raising a successful seed round, another often overlooked factor is having a diverse angel investor group. Having a diverse group of angels will offer you more connections, some that you may not have thought of. Filling your round with people of different backgrounds and expertise means you’ll have a better chance of being introduced to key people and influencers of not only your field but other industries too.
Some investors think that their angel-sized contribution of capital equals control of, or worse, a dictatorship of your company. You’ll want to vet angels ahead of time so you don’t end up with a headache trying to manage unreasonable expectations and demands. When an angel investor invests with unclear expectations of control, they can be a disaster for your future funding rounds and scare off interested investors.
Investors want to say yes. No one wants to miss out on the next Facebook, but many investors remain indecisive until convinced otherwise. They’ll want more proof, more data, and more spreadsheets, but not give a hard commitment. Stay away from these investors. If they aren’t decisive about what they like and haven’t given you a hard commitment after some time, it’s best to just cut your losses and move on. There’s no sense spending time and resources trying to woo investors that can’t make a decision for themselves, and you probably don’t want to work with those kinds of investors anyway.
While angel investors are an invaluable source of capital, your startup will likely turn to VCs for funding as well. And since VCs judge companies on their past investors, you’ll want to have a list of experienced angels rather than unpredictable players. Think of your investor list as a resume of sorts, one that will affect how elite VCs view your company. All things being equal, a history of working with angels known for picking winners will go a long way to getting the attention of VCs with deep pockets.
Suggested: How to Attract VCs as a Tech Startup
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