Angels are a crazy breed of human being that have the means and desire to wager large sums of money on the success of startups. Of course, these crazy and wacky humans aren’t as crazy as the typical gambler. They’re playing a game that’s rigged in their favor (as long as they play it right).
Let’s say that ninety percent of angel-funded startups fail – only 10% succeed. That means to break even, an angel must invest in at least ten startups that will each provide 10x return on investment if they succeed. To make an investment attractive, the angel will probably expect 20x on their return and a reduced risk of failure.
Fact and Fiction:
It turns out that many angels are less sophisticated than you’d expect. They dabble in startup land, placing a small number of bets on risky, high-stakes startups. While many entrepreneurs view these angels as attractive, because they may be swayed by emotion and desire, these angels are often not desirable. Because they place fewer “bets”, you’re less likely to convince them to bet on you. Because they are less sophisticated, they won’t behave as predictably when the $#!t hits the fan. They’ll flail and scream and threaten to sue, and, and, and. These angels may be demons in disguise. I picture the demon with a halo duct taped to his horns.
Angels rarely have all the necessary skills to vet a startup on their own. This is why many angels join a group or angel fund. Here in Colorado, the Rockies Venture Club is the largest angel group, but there are a variety of others that are quite successful. As a group, they pool their collective strengths, such as domain experience, legal expertise, financial knowhow, and mergers and acquisitions. They often pool their collective investment power. They also refer each other to awesome investments. If you can get in front of one of these groups, your odds are better than getting in front of a standalone angel.
Know Your Stuff:
Before you talk to a single angel about investment, you should know what you need to know. Know why your team is the right team. Know what problem you’re solving. Know why your customers want your solution. Know why the timing is right. Know how you’re going to go to market. Know what you’ll spend the investor’s money on. Know your burn rate. Know your competition. Know your key differentiator(s). Set milestones. Know your financials. These things should be more familiar to you than your eyelids.
Angel or Demon:
A demon is someone who will eat away at your most valuable commodity – time. There are demons out there. I try very hard not to be. I am very clear right now – I’m building Boulder BITS, and cutting back on my angel investing. I get to the “No” very quickly. You should expect angels to get to the “no” quickly. Otherwise they’re wasting your time. You can and should be direct with your investors.
Interested to Death
If an angel says, “Your startup is interesting,” you should thank them for their time and go on to the next angel. That is code for, “No thank you. I’m not interested enough to invest.” Any synonym of “interested” means the angel is trying to brush you off nicely. A really interested investor will just keep asking questions and ask for a time to start in on diligence or technical discussions. A follow-up means the angel may want to invest. Unfortunately, an act of disinterested kindness can be a killer. If you don’t know the secret code, you’ll mistake “interested” for real interest and waste everyone’s time. And wasting time is the killer of startups. By recognizing “interested” for what it is, you keep the investors as angels rather than turning them into demons.
Allies and Neutral Parties
Some angels are more helpful than others. They’ll introduce you to another angel. They’ll bring their “friends” in to vet you more thoroughly. View these angels as allies. Someone willing to put extra work into your company, and give you advice, introductions, and access to other angels is worth keeping close. This may be someone you’ll consider for your board. Other angels are more passive, just looking at an investment with you as a logical strategy to diversify or add growth to their portfolio. These angels are wonderful too. These “neutral parties” won’t interfere. They’ll just ride along. If everyone were an ally, you’d have investors up in your grill continuously. If everyone were a neutral party, you’d lack the investor perspective. If you can find a balance of allies and neutral parties, you’re much better off.
If you want to meet an angel, introductions are often helpful. You may find angels out of cold calls, but it is rare. An introduction goes a long way to vetting that the human in charge of a startup knows someone you trust. Because angels are investing in the team, they want to know that a person is trustworthy. The closer the connection that introduces you, the more trust there is. If one investing angel introduces you to another, that is like pure gold. Angels trust that the other angel isn’t going to invest unless they think it’s worth it. So that gets you past two levels of trust. First, they’re introducing you. Next they trust that your startup passes the bar.
Angels are Human
Investors are people too. They aren’t any better or worse. They just have access to larger quantities of money and are willing to distribute that money to risky fledgling businesses. Like most humans, angels have particular sectors that interest them and other sectors that freak them out. Personally, I am freaked out by the thought of investing in any company that requires FDA approval for a product or skirts the federal law (cannabis). While tech interests me, natural foods do not. I state this outright to anyone who approaches me from these sectors. We should be happy when an angel states that they are not interested. It takes the weight off.
Remember to think of angels as humans. We all are…
- The typical angel investment is $25,000 to $100,000 a company, but can go higher. (Richard Haroch)
- Angel investors like to see a clearly articulated elevator pitch, an executive summary or pitch deck, a prototype of a working model, and early adopters. (Richard Haroch via Forbes)
- “If you don’t have a seat at the table bring your own chair” -Midy Aponte
Author: Jesse Lawrence
Founder and CEO of @Boulder_Bits also a Sci-fi lover, game theory strategist, and idea generator