Think of angel investing like enriching your community. It’s symbiotic – you help empower someone you admire and trust to do what they love. In return, you get a close-up look at how they run their business, the social capital of being an investor in them, and a small chance of outsize returns.
As on a plane, you should make sure your [financial] oxygen mask is secured before others. I am by no means encouraging folks to take on debt to angel invest. I am however asking you to frame angel investing as a learning opportunity with upside potential rather than a just hard numbers return opportunity. I would argue angel investing is a much less expensive MBA if you’re writing tiny checks from $1000-$5000. Investing has become this new generation’s status symbol, and Alex Danco wrote a great piece on this social capital and its importance in January 2020.
So how do you angel invest? Let’s discuss some basics: etiquette, expectations, and logistics.
Etiquette:
There are some unspoken agreements about angel investing that are important to understand.
- Respect a founder’s time. Understand that for them fundraising is a full-time endeavor, and that they want to get back to building their business as soon as possible. More specifically:
- You will not likely receive crazy granular level analysis of the business (especially financial models) at an early stage. Don’t ask for them especially not if you’re writing a check under $50K.
- Make relatively quick decisions. Long no’s are really painful, long yes’s are OK. Quick no’s, even if they may feel painful at the time, are a blessing in disguise. They save a founder a lot of time. Quick yes’s are the best.
- Default to thoughtful questions over DM or email. Hop on a 20 to 30 minute phone call or zoom after. Here’s a template for reaching out to founders:
- “Hey x, I love what you’re building at Y. I’m beginning my journey as an angel investor & I’d love to learn more about your vision for the future of Y.”
- Try not to do blind intros. This etiquette is a result of “too-polite” society, but it’s an easy way to avoid annoying an investor who might reply harshly to a blind intro.
Expectations:
- Early stage startups are held together with prayers and duct tape. Read Paul Graham’s piece on startups here.
- Financial returns are a long way away. You’ll most likely, if the company succeeds, not see a return for the next 5 to 7 years and in most cases you’ll lose your money.
- Early stage deals often close very quickly. The time that I’ve seen now is around two weeks to a month after a founder prepares their deck which I consider to be the formal sort of fundraising. I’ve closed commitments for over $25k in a couple texts.
- You can ask the founder about logistics about investing. People are always willing to answer your questions about investing if it means that they’ll have money at the end of the day – and it can be a great learning opportunity for you.
- Early stage investing is much more hand-wavy than anyone wants to share. As much as people joke about *vibe capitalists* – investing off vibes is commonplace.
Logistics:
Will Quist at Slow Ventures told me that there are three main factors to early stage investing: See. Analyze. Win.
- See refers to your deal flow. It is important to increase the number of deals that you see to learn and have a higher probability of seeing a great deal. You can increase your deal flow by:
- joining communities of other angel investors or a cohort-based program like On Deck Angels.
- creating content(written/videos) about specific sectors of startups that are interesting to you. Here’s an example of Meagan Loyst’s Pet Tech market map.
- see available early stage deals on platforms like AngelList or equity crowdfunding platforms like Republic or WeFunder (these are available to retail investors).
- Analyze refers to your judgment applied to your deal flow. This comprises both your primary, secondary, and tertiary judgment.
- Primary judgment refers to your instinct on whether a startup is interesting to you. For example, I’m not interested in investing in bioscience deals. So trusting my primary judgment, I would pass on a bio science deal.
- Secondary judgment is your quantitative analysis of product-market fit, founder-industry fit, investing thesis, and timing. Here’s a helpful framework for covering lots of bases.
- Tertiary judgment refers to intuition. As you’re making a decision, listen to your gut and explore any red flags you may have seen in the process.
- Win refers to your ability to get into deals. With a smaller check size and the frothy markets now, you’ll have to prove that you provide a lot of value either in investor intros, strategic help, customer introductions, or hiring.
I’d like to add an additional one, Support.
- Support refers to your ability to support the founder post-investment. In other words, keeping to your word. When I asked a founder friend about what was most helpful to him for investors, he listed five things. The first two were table-stakes *things to avoid*:
- Don’t get in the way.
- Don’t offer advice unless asked for it. One of the core tenants in non-violent communication is to clarify “Would you like comfort or solutions?” Most of the time, people want to be heard, not offered solutions.
The other three things are bonuses, from his perspective:
- Validation – investors from backgrounds that strategically validate their ideas / execution
- Networks – specifically for recruiting, hiring, and investor intros
- Being a cheerleader
So say you’ve gone through the see, analyze, win process and found a deal that you’re really excited about.
How do you actually invest?
Once you win and “commit” to a deal, you make a non-legally binding commitment to write a check of that size to the founder. From that point, the founder will send you documents detailing your investment agreement. If it’s early-stage, you’ll mostly likely make the investment using a SAFE, simple agreement for future equity. If you’re investing directly, you’ll probably sign them via Docusign. If you’re investing via a syndicate on AngelList or Assure, you’ll fill out the documents on their platform. After completing the documents, you’ll receive wiring instructions.
You’ll then send a wire & boom – you’ve made your first angel check!
If you enjoy my writing, I’d recommend following me on Twitter @paigefinnn. My mission is to educate the next generation of venture investors, so I share transparently about my journey there. If you want to learn more about venture, I wrote an illustrated children’s book on the why, how, and what of venture – Seed to Harvest (my brother illustrated it & our featured image for this blog post is his). I also co-founded Behind Genius Ventures, an early stage venture firm focused on investing product-led growth companies in the future of work and the future of play.