Understanding Angel Investors

While venture capital firms (VCs) often capture the public's attention, another significant player in the funding ecosystem is the angel investor. But who exactly are angel investors, and what should entrepreneurs understand before seeking their support?

1.  Who Are Angel Investors?

Angel investors are accredited individuals—those with a net worth over $1 million, excluding their primary residence, or with an income exceeding $200,000 individually, or $300,000 jointly with a spouse or partner in each of the prior two years—who are willing to invest in early-stage companies that align with their personal interests. Unlike VC firms, which manage pooled funds from their Limited Partners (institutions or high-net-worth individuals), angel investors typically invest their personal funds. In 2023, the median angel investment was around $25,000.
 

2.  The Swift Due Diligence Process

One notable aspect of engaging with angel investors is the expedited due diligence process. Unlike the long negotiations with VC funds, angel investors typically move faster. It is common that a few meetings suffice before they make a decision on whether to invest or not. For this to happen, it’s crucial to have terms agreed upon, usually negotiated with a lead investor.

3.  Understanding Risk and Valuation

Angel investors are known for their high-risk appetite, surpassed perhaps only by friends, family, and a few fools. Entrepreneurs should keep this in mind during negotiations, ensuring terms aren't overly punitive. Moreover, angels expect substantial returns, often aiming for 10-20 times their investment. This highlights the importance of justifying a significant increase in company valuation in the coming years.

4.  Realistic Expectations: Prototypes and MVPs

Angel investors typically prefer to see a completed prototype or minimum viable product (MVP) before investing, though exceptions exist based on industry and relationships. Entrepreneurs aiming to secure angel funding at the ideation stage may face challenges unless they have a strong track record or pre-established relationships.

5.  Maximizing Angel Outreach

One effective strategy for reaching angel investors is to tap into angel groups. These are networks of individual angel investors who come together to collectively review and invest in promising startups. Angel groups offer entrepreneurs the advantage of accessing a pool of investors with diverse backgrounds, expertise, and resources.

To reach out to angel groups, entrepreneurs can attend networking events, pitch competitions, or join online platforms specifically designed for connecting startups with angel investors. Presenting to a group of angels allows for exposure to dozens of potential investors simultaneously, making the fundraising process more efficient and maximizing the chances of securing funding.

6.  Dispelling the Mentorship Myth

Contrary to popular belief, angel investors are rarely hands-on mentors. With portfolios often spanning dozens of companies, they just don’t have the bandwidth to provide mentorship to each of their portfolio companies (nor introductions). Entrepreneurs should temper expectations regarding ongoing mentorship and support.

7.  Realistic Funding Size

While angel investors play a crucial role in early-stage funding, it's rare to close rounds exceeding $500,000 solely with angel investment. Due to the typical check sizes, angel rounds tend to be smaller, often below the $250,000 mark.

In conclusion, understanding the nuances of engaging with angel investors is essential for entrepreneurs navigating the startup funding landscape. While they offer valuable support to early-stage ventures, entrepreneurs must approach angel investment with realistic expectations and a clear understanding of the process and dynamics involved.

For those seeking more in-depth insights, I highly recommend diving into "Angel" by Jason Calacanis, where he offers firsthand experience as a successful angel investor (Uber, Robinhood, Calm) and provides invaluable guidance for entrepreneurs.
 

Fernando Moreno
Growth Partner