The pursuit of startup funding starts with three questions:
Where are you, and where do you want to get to?
What actions are required to get you there?
How much will those actions cost?
If you can answer all of the above in detail, and if that cost is less than a million but more than $100,000, you might just be a prime candidate for angel investment.
But when you’re bringing third-party investment onboard (anything that’s not debt or bootstrapping), a very important fourth question enters the chat:
What will your company be worth when you get there?
Angel investors are those friendly souls with a healthy flow of investment cash, institutional knowledge, and usually a personal incentive too, whether it’s giving something back after a successful exit, or shifting into a more hands-on advisory role.
Angels can be big or small fry. But the more influential they are, the more clout they’ll bring and connections they’ll help you make.
But although angel investment might feel less risky than FFF (friends, family, and fools) rounds, and less intimidating than a big shiny venture capital firm, angels will be just as preoccupied with that fourth question as any professional investor.
Angel vs. VC
Angels don’t have the capital firepower of a VC fund. But they have experience, expertise, and networks that can help you overcome industry-specific challenges.
They’re not an alternative to venture capital – rather a stepping stone to seed or Series A rounds that angels will very much encourage. Crucially, they can give your pre-seed startup the credibility it needs to attract future investments, specifically from VCs.
The main difference is that an angel is spending their own money – not a fund full of other peoples’. Their involvement is closer to home.
This is usually a good thing, and angels are generally a well-intentioned bunch. But there are situations in which things can get less friendly.
New and inexperienced founders in the early stages of sourcing investment can be taken advantage of by angels asking for big chunks of equity, unfair interest, or not keeping up their end of the advisory bargain.
There’s tons of information out there about what investors are looking for when assessing your startup. But what should you look for when assessing them?
Finding your angel
It’s perhaps obvious (and a little patronising) to make the point that angels won’t come to you. But some founders underestimate the legwork that goes into finding fruitful connections.
You need to be at industry events and conferences, join industry organisations, leverage personal connections (preferably professors, colleagues, ex-bosses rather than friends and family), and use social media.
Look around at startups similar to yours. What did they do when they were at your level? Every major city has angel groups. Who’s participating in pitch competitions and startup weekends in your region? What was their investment trajectory?
LinkedIn networking gets a lot easier when you have some kind of presence. A fully fleshed out business page and a handful of posts or thought pieces goes a long way. It’s not about how many connections you have, but at the same time, it’s obvious when you neglect your account.
You can also join a funding platform like Wellfound (formerly AngelList) as an investor to observe how real deals are structured and promoted on a daily basis. You’ll have access to the terms of investment, pitch deck, valuation, co-investors, and traction, allowing you to follow other founders’ angel journeys (without needing to actually invest).
When it’s time to sign on the dotted line, consider using the Y Combinator-inspired SAFE format.
SAFEs (simple agreement for future equity) are a faster, cheaper alternative to convertible debt. You can find a template online. Essentially, you exchange money for an amount of equity in the company to be determined at a later valuation round. This way you can avoid giving away oversized equity portions.
Hire a lawyer (ideally one who specialises in SME/startups). Doing this will cost you a few thousand dollars but it’s much cheaper than not doing it.
Put a shareholders agreement in place, and be mindful of the implications of a large equity giveaway on your cap table.
Finally, due diligence isn’t just for investors. Pay close attention to an angels’ track record of previous investment successes or failures.
Ultimately, finding an angel is a game of matchmaking. You and your angel will have close, personal involvement over many months or years.
It’s less about securing big influxes of cash (that comes later). It’s about choosing the person who will help you market and scale, and building a relationship that’s long term, authentic, and mutually beneficial.