Let’s see, you are a first-time entrepreneur and you are close to having spent all of that family and friends money on your great idea for a new product or service. It’s now time to raise a seed round of at least $500k and you know your best option for sources of capital is the Angel investor market. Or at least that’s what you’ve been told or read about. But that’s about all you know.
You don’t personally know any Angels or anything about this market. You are probably researching like crazy to catchup and figure it out by checking out the Angel Capital Association and a plethora of similar networks and resources online.
Your head is spinning. At least mine was my first time.
Well, I’m in the mood to offer some free advice. Not all Angels are alike so I am going to focus on breaking down their characteristics such that you can profile them in the sales process. Yes, this is a sales experience. If you have no sales DNA in your bloodstream you need to bone-up on it fast. You’ve got to find them, qualify them, pitch them, again, and again, answer a bunch of questions, and then close.
But before I get to profiling and qualifying Angels, check out my short blog on the topic called Anatomy of An Angel Investor which briefly lays out the pros and cons of using Angels as investors – as if you have a choice.
Okay, after all of your research you now understand that Angel investors run in packs for the most part. There are certainly individuals who operate as lone wolves, but they are rare. They most often run in three basic types of packs.
Hunters:
These are small groups of super high-networth individuals who previously made a ton of money working together as entrepreneur/operators. Now they are making a ton of money working together as Angel investors. They may combine or syndicate deals with other similar Hunter groups. But they like to operate in stealth mode and even launch startups on their own. Getting in front of the Hunters is tricky and if your great idea isn’t bullet-proof once you get the opportunity to pitch them, you’ll know in a snap.
Farmers:
These are the formal and quasi-formal Angel Groups or Networks in almost any city or state market in the country. They don’t pool their money. Instead they opt-in deal by deal. They often have a “process” to see pitches and move them through evaluation, but these can be inconsistent between Networks and even within a network. The value to you is volume. One to many. Why am I calling them Farmers? Because they advertise for deal flow and cherry pick the best pitches and deals. They aren’t working hard to find the best startups that fit an investment thesis like VCs and Hunters do.
Marketplaces:
These are essentially tech-enabled dating sites for entrepreneurs and Angels – a form of crowdfunding. The TEN Capital Network is one example. Some do have high-networth investors in the marketplace but many do not with the investors barely qualifying as an SEC Accredited Investor. These angels are making small investments for the most part which is problematic. Why? Here is one big reason – as a CEO/Entreprenuer you want to maintain a clean cap table. What is clean? It is having the fewest number of investors who provide(d) adequate capital, who are aligned as much as possible with each other in terms of deal structures, and ideally, who can contribute in some non-financial manner. Crowdfunding lots of investors doesn’t help with any of these. It could very likely result in your day job being the management of your investors and your night job running the company.
With both Hunter and Farmer Angels they all have characteristics. You will need an Angel targeting strategy that includes knowing what your minimum requirement characteristics are, your nice to have characteristics, the above and beyond value characteristics and the all-important red flag characteristics.
Minimum Requirements:
They must be an SEC qualified Accredited Investor. No short cuts here.
Previous experience with Angel Investing. Especially if you don’t know the person. Your family and friends should be your only virgins on the shareholder team.
He or She can write a check for your minimum amount.
US Based if you are a US firm. Room for exceptions but a good rule of thumb for Angel shareholders.
Understands the Angel ROI timeline is 4-7 years. If they are experienced, they will know this. You don’t want a shareholder with a short timeline and/or fuse.
Not a requirement so much but ideally you want to pool your Angels into LLC groups to keep your cap table as clean as possible.
Nice to Haves:
They understand your domain: knowledge and experience of the industry, your business model, technology, B2X are examples. The more they know the better.
They have CXO entrepreneur operator level experience. Not a doc or lawyer. It’s nice to have shareholders who know what you are going through and can lend advise when requested.
Have Board of Director and/or Advisors experience.
Are members of a pack. The seed round is not the last round. You will want your shareholders to help you find more down the road if you are still raising capital in the Angel market vs the VC market.
Have had a successful Angel exit and failure. Yes, the more they know about the ups and downs of Angel investing the better off you are.
Reasonably close proximity to you. Not a requirement but nice to have.
Above and Beyond:
They have a significant network of other like-minded investors, customer and partners that can be of value to the business, especially with your growth objectives.
They have had a successful entrepreneur exit. Hopefully no failures but hey, as the saying goes, “we learn more from our failures than our successes”. Might as well learn from other people’s failures.
Is a Limited Partner in a VC fund and/or connections to Venture Capital operators and their funds. I know you know what I’m thinking here.
Is able and willing to provide follow on funding.
Red Flags to Look For (these might be the most important set of characteristics):
They can’t provide examples of Angel investments they have done, and the lessons learned.
He or She wants some level of unreasonable control like a board seat (for the minimum), special deal terms, or considers themselves a co-founder. There is passive investing and active investing. This is neither. Active is fine as long as there is a clear understanding of what Active means between you and Mr. Angel. This is more about unreasonable control expectations. No thank you!
During the mating ritual you experience inconsistent communications and or she is being unreasonably unresponsive. DQ ‘em. If they behave like this before becoming a shareholder, they will continue to do it. And how will that work out when you need your shareholders to vote on the next round of funding or that incredible acquisition you want to close.
Slow learner to grasp the details. This might be more of a yellow flag but I’ve had shareholders who took twice or three times as much of my time to explain things than to the average bear. Not worth it if you don’t have to make this exception.
Can’t meet your minimum investment. Try hard to not make this exception. Trouble Will Robinson.
Using funds from their IRA. Nope. Don’t want this person. They will be in your ear worrying about their next egg.
Expecting a quick return.
The guy is known for crowdfunding investments. This will invite a mismatch of expectations. Not a deal killer all things considered but….
Well there you go. Free advice from years of being on both sides of the Angel marketplace. I hope you find it valuable in making your search for Angel investors efficient and successful.
As a bonus here is my short blog post on How to Communicate with your Angel Prospects during the courtship and my Article on Why It’s So Hard Raising Seed Capital in today’s market.
David Karabinos, CEO | Healthcare Technology Strategist | Investor