As founders, investors, and operators, we have different perspectives on the startup landscape. Still, we are united in our desire to have more women among the ranks of angel investors. Only 2% of capital goes to women-led startups. Just 35% of VC firms have a female partner. It’s encouraging that over a quarter of angel investors are now women, up from 5% in 2004; still, our industry’s lack of balance remains an embarrassment.
Angel investing isn’t the right choice for each individual, but it should be open to everybody. In this post, we lay out the pros and cons of angel investing and how to get started.
Why Angel Invest?
The first question to ask is why angel invest in the first place? From an expected value perspective, you are almost certainly better off investing in public markets. However, many non-monetary benefits to investing early often hide behind the bravado of big checks.
Expand your tool kit: Putting meaningful amounts of money on the line forces you to learn about the latest developments in a more impactful way than simply reading more tech news. In addition, meeting inspiring teams tackling important problems and learning about new markets can help expand the lateral thinking you apply to your own business in a powerful way.
Auditioning for VC gigs: Perhaps you are interested in joining a venture firm at some point? Your prior work experience may be enough to land an investment role. However, building a track record of investing, and demonstrating an interest in the craft, is a great way to deepen the conversation. In addition, you may well meet your future partners by co-investing.
Next-level networking: Some of the people you invest in may start junior to you in terms of professional progression but could soon become peers or even outpace you. It’s not uncommon for the person you back at a critical moment to advocate for you down the road.
Social capital: Investing opens doors. It puts you in conversations to which you might not otherwise be privy. To be clear, investing $10,000 in startups won’t change your career trajectory overnight, but it will likely lead to new opportunities.
Giving back: You’ve probably had help along the way; an investor who bet on you when no one else would or an advisor who didn’t lose faith during your darkest days. Angel investing is an opportunity to pay it forward. But, unfortunately, it’s easy to underestimate the amount of knowledge you possess or its value to those at the beginning of their startup journey.
Enrich yourself: Angel investing is a high-risk, potentially low reward exercise. But, of course, there is also the chance that your $5,000 check goes into the next Canva, Bumble, Gingko Bioworks, or Figs. So don’t bank on that happening, but it’s a perfectly healthy aspiration.
How to Angel Invest
First, push back on any imposter syndrome worries you may feel. There is no credential or exam required to angel invest. A ~$2,500 check and the trust of a founder is all you need to get started. You belong at the table and bring a unique perspective — act like it. Figure out an area you may have an angle or an edge and flaunt it.
Start sourcing: You don’t actually need money to start angel investing. Suppose you can consistently identify early-stage startups and introduce them to investors. In that case, there’s a chance you could be made a “scout” and given funds to invest.
You can start looking for deals in your personal network. Let people know you’re investing when you chat. Refer to your angel activities on Twitter and LinkedIn. If you find a promising early-stage company or know a talented founder working on something new, reach out to them. It really is a simple process — don’t be intimidated by it!
Learn the financial/legal basics: Before embarking on an angel investing path, make sure you’re financially and legally able to do so. In order to invest in equity financings, you must meet the requirements of an accredited investor laid out by the SEC. If you don’t meet these qualifications, your name on the cap table can land a startup that you back in hot water and may impact your standing in the startup community.
Before you write any checks, you should also become conversant with the differences between convertible notes, SAFEs, and priced equity rounds. Learning the rudiments of how valuations impact your investment is a crucial skill. There is a massive difference between investing at a $50M valuation versus a $5M valuation.
Join a syndicate: Instead of striking out on your own, you might want to consider joining a formal angel syndicate. It’s easier to get started, and it may accelerate your entrance into some markets. The major downsides are fees you’ll pay and fewer opportunities to meet with founders, which blunts some networking opportunities. You can start by looking at AngelList, but some syndicates form around alumni from schools and startups. This structure can often be the easiest way to start.
Build a portfolio: Diversification of risk is a critical component of early-stage investing. It’s also important to be writing checks regularly if possible. If your funds are limited, trying to find advisory roles or simply offering consulting services can keep you top of mind. But be warned, if people feel you’re not active, you will quickly drop out of valuable networks.
Get in early: You need to invest incredibly early if you want to make money angel investing. Founders with credible work experience and a PowerPoint deck routinely get $10M pre-money valuations to give you a sense of perspective. So, if they raise a $3M pre-seed round at that price, a $5,000 angel investment will buy you a 0.04% equity stake.
If the exit is large enough, even this tiny fraction can result in huge gains! However, you also need to factor in further dilution from future fundraises, the potential of ruinous recapitalization, down rounds, and dozens of other value-destroying developments that can befall a startup.
Get in late: Another approach is to try and invest in startups in their A/B rounds. The financial returns in this model are much, much lower, but there will be more signals and proof points on the company. You’ll likely be buying into rounds that value the startups at $50M-$100M. The goal here isn’t maximizing financial ROI but rapidly accruing social capital and gaining confidence. The purpose of this strategy is to claim you are in the hot deal du jour. One benefit of this approach is that you may be able to get liquidity faster as there will likely be more opportunities for “secondary sales.”
How to Build Your Profile
VCs with billions under management, world-class brands, and teams of hundreds are having to fight and scrape their way into deals. You, as a newly minted angel, face challenging odds. A compelling personal profile is the coin of the realm in the angel investing world, so start polishing yours ASAP and get comfortable with some self-promotion. That being said, figure out a way that feels authentic to you — there’s no one way to go about this.
Define your brand: What is your unique selling proposition? Do you have a startup superpower? Why will founders call you for help? Can you share this knowledge widely? It is doubtful that you’ll get unsolicited deal flow as a new angel. Instead, you have to find a way to get yourself associated with specific industry vertical, technical skills, or operational expertise so that you become an appealing partner to entrepreneurs. Think of how Li Jin became synonymous with the creator economy.
Engage with the investment community: A large number of the predominantly male venture capitalist class are embarrassed by the gender disparity in tech. Start reaching out to investors who have publicly made comments along these lines. Let them know you are angel investing and would love to work on a deal with them.
Thankfully, there is also a growing number of female investors. Attempt to make connections with this group as well. In addition, more institutional investors are beginning to appreciate the benefits of diverse cap tables and are actively seeking out emerging angel investors to include in their deals.
Demonstrate how you can help a founder: Make intros in advance of investing. For example, offer to brainstorm product concepts if that’s your specialty, dive into an operational issue, or otherwise help the entrepreneur get a sense of the kind of value you can provide. Getting into deals is tough, so expect to give before you get. Founders are friends with other founders and will be your referral network. Your goal should be to become their number one advocate and their first phone call when help is needed.
Be responsive: Investing decisions happen fast, and people who share deals with you will want rapid responses. If you’re not comfortable making decisions in 2–3 days, the current angel environment might be too frenetic, and you’ll miss out on many deals.
Be a mentor: Lack of representation and role models is one of the biggest reasons there are so few female investors. While the world is awash in venture capital, founders have few steady sources for high empathy allies who understand the stress of operating in a modern environment.
Find a mentor: While you’re offering help, be sure to ask for it. Ideally, you want to find a more experienced investor who can answer the inevitable questions you’ll have and who can provide advice on tricky situations you’ll face. Investing is a craft, and it helps to have a teacher.
Find your tribe: Often, startups will have minimum investment requirements to keep their cap table manageable. E.g., they’ll not accept checks below a $50,000 threshold. To get into these deals, you’ll need to have a crew that can pool their investments. This kind of group is hard to structure on the fly, so start working with peers ASAP. It will also help to have thought partners to debrief and discuss deals.
How to Evaluate Companies
There is no secret formula here. Don’t be cavalier, but there’s also no proprietary evaluation method that you need to discover or learn. It’s nearly impossible to spot a unicorn at the seed stage with any certainty. You will rarely be ‘sure’ about an investment, but trust your experience and instincts — don’t listen to imposter syndrome.
Develop frameworks and hone them over time: Intuition and emotion are powerful tools, further leveraged in partnership with evaluation frameworks — some heuristics to evaluate with: use case, founder, product, market, terms, etc.
Back people you’d hire: One helpful heuristic is to invest in the kind of person you’d hire into your company or team. Think about the common traits shared amongst the best people you’ve worked with — strategic, great storytellers, ability to execute, etc. — and look for those in founders.
Leverage your experience as an operator: Your engineering and marketing teams are likely testing new tools. Do you see a new dashboard in your weekly updates? Are you approving spend on new dev tools? If so, it’s probably worth checking to see if those companies need capital.
Trust your gut: VCs make a big deal out of “thematic investing.” Some believe, and others pretend, that they’ve figured out in advance which sectors are going to be hot. But, as an active operator, you likely have a better sense of what will move the needle and are probably closer to consumer trends.
Practice with friends: Look at your favorite early-stage companies and take notes with your framework. Create time to talk about tech developments with friends. Organize a “book club” to review pitch decks of renowned companies.
What to Expect When you Angel Invest
Many think investing is a glamorous activity. It’s really not. The reality is a lot of hustling to get access to investment vehicles that are incredibly volatile and illiquid at terms that are out of your control. Elbows can be sharp to get into deals, so be bold and strongly advocate for yourself when needed.
Huge Losses: Most investments don’t pay off. Only invest what capital you can afford to lose, and prepare that that might mean all of it. We can’t overstate this. If you make ten investments, there’s a high likelihood that each one of them will fail.
Slow Returns: When the money does come in, it will come in slowly. You may get lucky and get paper markups quickly or opportunities to cash out in secondary sales, but liquidity usually takes time.
Limited Attention from founders: If you write checks in the $5K-$25K range, don’t expect to be pitched formally. There’s a limit to the kind of due diligence founders will indulge. You’ll have almost no ability to set terms. Even after you invest, you may quickly end up below the company’s threshold to share financial information with you.
If you have the appetite for risk and the financial resources to spare, angel investing is an unparalleled opportunity. The personal growth and non-monetary rewards that accrue to angel investing can be fulfilling and open unexpected doors. So don’t wait for a formal invitation to get started and if you decide to take the plunge, please reach out; we’d love to meet you.