So you want to be an angel investor? Join the club. While the term “investor” once connoted images of wealthy businessmen making deals in stuffy board rooms, the emergence of online entities like AngelList and FundersClub give founders yearning for a piece of the action the ability to get some skin in the game. What’s more, participation in angel groups has risen over 300 percent between 1999 and 2013.
But before you sign up for one of the many angel investing “boot camps” popping up across the globe, here’s what you need to know about how to become an angel investor (and not screw it up).
Supporting the Dream
Becoming an angel investor first requires an understanding of where and how your resources -- monetary and nonmonetary -- come into play. One of the main motivators for entrepreneurs to become angel investors is because it gives them a platform to support the community they are so deeply vested in. And this decision pays off in dividends: on average, 3.6 U.S. jobs are created per angel investment.
“Angel investors are extremely critical for the startup ecosystem, and I feel like I wouldn’t be where I am had it not been for angel investors. ‘Angel’ is kind of an apt name: you give young entrepreneurs a shot before they can actually do what they say they’re gonna do,” says Prerna Gupta, Founder and CEO of Telepathic, a narrative technology company that just launched its first app, Hooked.
A serial entrepreneur herself, Gupta got her start nearly a decade ago, working on her first startup for four years before diving straight into her second startup, Khush, which was acquired by mobile app development company Smule. This exit provided Gupta with liquidity she’d never had before, and she began angel investing once that transaction closed.
Owing her successes to the angels who helped make these ventures happen, she points out the lowered barrier to entry as a contributing factor to the ease of becoming an angel investor: “AngelList has leveled the playing field -- you can see what the trending startups are, who’s investing in them that you know, and then reach out to them. [These tools] are starting to have a huge impact.”
AK Kurji, serial entrepreneur and CEO of BrandNex.com, sees angel investing as a mentorship opportunity to coach those who were once in his shoes. “I pretty much started with nothing, and now I’m able to provide resources so [the entrepreneurs] don’t make the same mistakes and waste time like I did. Something that took me a year to learn, I could teach it to them in a day,” he says. Kurji started his first business in his garage, and began investing in small startups by setting up an incubator model in which he provided them with funding and resources.
While venture capitalists generally like to see a little traction (such as sales or purchase orders) before investing, angels provide a springboard for budding entrepreneurs who may not have the critical connections needed to get moving in the market. Ziver Birg, CEO and Founder of Zivelo, notes the angel community’s willingness to welcome anyone’s idea, whether they’re a new founder or have been working on their business for a while: “Even if you’re not connected per se, you can still pitch and hopefully impress people and get access to capital using the angel network.”
On the Hunt for a Unicorn
Facebook, WhatsApp -- it’s these alluring names that have would-be investors salivating at the thought of adding a growing startup to their portfolio that could one day achieve worldwide recognition (and unicorn-level valuations). But with so many startups positioning themselves as the next big thing, how does an angel investor determine what is a viable investment versus one that is destined to fail?
“It all boils down to design,” says Birg, whose formulaic approach is so effective that he can usually reach an investment decision over the span of a weekend. “If you break down design, it’s all a program: how to deliver that product, how to communicate with customers -- everything can be programmed.”
Given that the vast majority of startups fail regardless of funding, it’s critical that you spread your risk out as much as you can, just as you would with any other investment opportunity. “It’s important to diversify,” says Gupta. “You can’t be an investor in just one or two projects, and there are more [angel investment] avenues now than there were 10 years ago.” When it comes to uncovering the next unicorn, keeping your finger on the pulse on what’s going on in the world of investing -- while fully accepting the associated risks -- may just be the ticket.
“If you invest in 10 [startups] and four are successful, the rewards are so great that it ten- or one hundred-fold [makes up] the loss of the six,” says Birg. “Know the markets and understand what’s trending. The U.S. typically is the first to come up with a very strong idea that has unicorn potential, so you could go after startups in other countries with similar models so your success rate is greater.”
While being aware of what’s hot is paramount, angel investors must also rely on their gut instincts to assess whether they’re hedging their bets on the right players. For Kurji, having a sense of the leadership team’s track record and work ethic have been the best indicators for future success: “People are making bets on hype, but I’d rather place my bet on the person versus the idea. I see two types of people -- an entrepreneur and a ‘wantrapreneur.’ I look for someone who will wake up at 4:00 a.m. on a Sunday [for their business]...every ounce of blood, sweat and tears amounts to the work ethic you put in.”
The Pros and Cons of Investing With a Network
Once you’ve researched a deal that looks promising, it can be tough to take the plunge and put your chips on the table. For those who may not be ready to make an investment deal on their own, an angel network provides an opportunity for newer angels to share the risk with their fellow investors. Enter syndicates: Defined by AngelList as a means of “allowing investors to co-invest with angels and VCs in exchange for carry,” syndicates offer an excellent opportunity to participate in a lead investor’s deals.
“Syndicates are important,” says Birg. “Angel investing with other angels is recommended, especially for angels just starting out. If you’re backing your neighbor down the street, you’ll have a high chance of failure [if investing solo]. With 20 different angels, the chances for success are greater because the syndicate is more powerful and they know what they’re doing as a group.”
In addition to lowering your perceived investment risk, an angel group also forms a viable conglomerate of shared resources. Often having roots in the same niche or industry, the investors themselves can thus pool their expertise to offer a wealth of knowledge that is attractive to entrepreneurs seeking to raise seed rounds.
“The community can help you and [other members] source deals, and you can ask them since you have a great community,” says Randy Rayess, angel investor and Co-Founder of VenturePact. “You can add more value to the preferred companies you're investing in because you have that network, so you know who to ‘dish off of.’ Say someone is looking for an enterprise marketing solution -- boom -- I know the guy to go to for B2B marketing.”
While angel networks benefit from a community of experts and shared resources, they also run the risk of appearing unkempt or unstable. With so many stakeholders and no centralized decision makers like those that venture capital firms possess, they must keep their processes as organized as possible to entice entrepreneurs -- and ensure the network continues to receive lucrative deal opportunities.
“In an angel network you have to be more professional -- this can be done by selling the value of your group and its members, and being present in the process,” says Randall Crowder, Managing Partner of TEXO Ventures, who also emphasizes the importance of showcasing what you have to offer entrepreneurs seeking an investment. “[Angel networks] add great value: a bunch of people from all different walks of life who are successful in their own right and can add a lot of value and mentorship to a young company. Angels need to promote that, and give the entrepreneurs clear expectations on what their process will be like. I used [this strategy] with my angel network and we saw a better deal flow because of it. We set our members up for success.”
Are Angel Investors the New VCs?
With angel investors becoming a more viable means of raising capital and gaining mentorship, this shift begs the question as to whether VC firms will still be considered the go-to source for funding in the years ahead. Gupta, for instance, didn’t even need the help of VCs to back her business. “We raised $2 million in two different angel rounds, and it’s perfectly conceivable that we could raise another seed round,” she says. “It was once thought that if you weren’t raising a Series A, you were dead, but now you can go raise another angel round.”
And unlike VCs, who may have a 10-year fund where they invest for five years and then harvest for five years, the landscape is evolving so that angel investors can expect to see a return on their investment a whole lot sooner. “People want to see their money within a year or two versus five to 10 years, and are looking for companies that are able to generate revenue quickly, versus a Facebook or Pinterest that took a long time to figure out a business model that worked,” says Kurji. “I want to do something that will put food on my plate rather than having to wait five years.”
With the stakes higher than ever for angels to be rewarded for the risks they’re taking on early-stage startups, angels from across the globe are finding meaningful ways to unite in a way that was not previously possible.
“I think angels are probably one of the most interesting changes in investing we've seen in a while,” says Rayess. “What's amazing about angel investing is that you can invest and source deals that you would never have access to if you were, say, if the middle of the Texas [rather than] Silicon Valley. I can lead a deal [on AngelList], but alone I probably couldn’t close the whole deal on my own. So what I'll do is I'll syndicate the round with others.”
Perhaps the greatest indicator of the angel network’s rise in popularity and recognition is its strides in becoming more cohesive and attracting the interest of those who would not have previously been considered investors.
“Existing established angel networks and organizations are becoming more organized and more professional. Some are even raising funds to function like microventures,” says Crowder. “Before, angel networks were always viewed negatively: they might be tire kickers or not taken seriously. Now they’re taken very seriously. The interesting thing about angel networks becoming more professional and larger, and more successful entrepreneurs becoming angel investors, is that this has effectively taken the wind out of the sails of the VC community.”
While it may now be simpler for anyone to achieve the status symbol of adding “angel investor” to their resume, it certainly isn’t easy to do well. It requires a critical assessment of the landscape -- both of the entrepreneurs seeking investments and of your fellow angels -- as well as an innate sense of what deals to go after (depending on how much luck comes into play).
Grounding yourself in your experience as an entrepreneur and not being afraid to get your hands dirty will yield the greatest chance of success and fulfillment on your behalf -- after all, it’s not only your money that’s on the line. Before you spread your wings, it’s worth it to invest your time in learning from fellow angels before you take a shot at investing in the next ‘unicorn du jour.’
This feature originally appeared in our Winter 2016 issue of YEC Quarterly, our print magazine for YEC members. If you’re a YEC member, feel free to download all previous issues of YEC Quarterly here.