What is angel investing?
History of angel investing
The concept of angel investing has been around for over four decades, with William Wetzel credited as its founder in 1978. The idea was born out of the production houses of theaters, where wealthy individuals would lend money for performances and earn a return on their investment once the shows started generating revenue. Wetzel noticed this pooling of money and developed the angel investor idea.
Today, Silicon Valley has become a hub for angel investors, and many startups aspire to have a Silicon Valley investor in their portfolio. In 2011, Silicon Valley accounted for 41% of all startup investments in the USA alone.
There are an increasing amount of options for angel investors to choose from, such as community angel investments with PIN or various boot camps that are organized annually for startups to connect with angel investors and secure funding.
What is angel investing?
Instead of fumbling over how best to explain what angel investing is, we decided to ask ChatGPT to explain it to us (like we're 5), and here’s what it said:
Angel investing is when a person with a lot of money helps someone who has an idea for a new business but not enough money to make it happen. The person with the idea gets money from the person with a lot of money, and they work together to make the new business happen.
In return, the person with a lot of money might get some of the money that the new business makes in the future. It's like sharing toys with your friend - you both get to play with them, but sometimes one person has more toys than the other and can share to help their friend have fun too.
How can you angel invest and is it a good idea?
In the past, it was much harder to write a check due to strict regulations and lack of what is known as deal flow (access to new startups), but now there are many ways you can start angel investing.
- Investing as a community through PIN - With PIN, you can set up an investment vehicle with your own trusted group of people, and have fun learning alongside each other. PIN's platform handles all the legal work, so you can focus on sourcing the best deals. Unlike other angel investing options, with PIN's platform both accredited and unaccredited investors can put money down.
- Crowdfunding - Crowdfunding platforms like Kickstarter and Indiegogo enable people to pool their funds to invest in a startup. Crowdfunding is usually one of two types: reward-based crowdfunding, wherein investors receive non-equity rewards like products or services, and equity crowdfunding, in which investors receive equity in the business.
- Solo angel investing - This is when a person invests their own money in a startup. Solo angel investing gives investors complete control over their investment decisions so they can build a deeper relationship with the startup in which they are investing. Investing as a solo angel can be a high-risk, high-reward endeavor since you don't have the support of a group.
- Joining syndicates - Angel syndicates are groups of angel investors who pool their funds and engage in startups together. The benefits of joining a syndicate include access to a larger network of startups and investment possibilities. As a community, investors can profit from the expertise and experience of the other members. However, as they are investing as part of a group, investors may have less control over their investment choices.
How to build your deal flow
There are 3 aspects to getting good deal flow:
1. Be recognized as an expert
This is the hardest and most time-consuming to achieve, but also extremely beneficial in the long run. The amount you can invest won’t matter as much if you first develop an area of expertise that you’re known for helping founders with. This will also help you grow your network tremendously. Start by offering to help founders wherever you can without any expectations.
It’s not only about learning to pick the right companies but also about being able to help them achieve success. Your expertise is what you'll build your brand around.
2. Invest with your own community
Investing in startups together by forming a group from your network and your friends’ networks gives you a massive advantage vs. doing it as an individual. Startup investing is risky, & you have a bigger chance to be successful when you invest together as a community. You can find a few other people to help you lead the investment group so you can:
- all share the different tasks
- learn from each other since you prob won’t understand valuation and other important metrics that well yet.
When you invest as a community, you’ll also open the doors to meeting many new people and making new connections you otherwise wouldn’t have. As a community, you can write smaller checks and invest in more companies so you have a diversified portfolio. The more deals you make, the more people will hear about your name and know about you as an active investor.
And the more deals you have, the bigger your chance of success.
3. Invest with an existing angel group
The good news is there are many groups out there to choose from. To join, you’ll usually need an intro so you can always search for one of the members and message them. These groups are generally not hard to join and a good starting point if you have no network at all.
However, you need to evaluate them carefully. Some are more social groups than serious investors, and you need to make sure the group knows what it’s doing or you’re going to end up making a lot of bad investments. Many of them also have expensive membership fees and require minimum check sizes of $25k.
Make sure that if you join one there are some decent investors in the group already so you can learn from them and use it as a guarantee that you won’t be making the worst investments.
The bigger the group, the more access to deal flow and to invest in the same companies alongside top VCs, as you will have a much bigger network and access to founders.
Red flags to look out for when assessing founders
Lack of commitment - Starting a company might be easy, but staying consistent with it is not.
Lack of communication skills - Be it within the team or with the people outside of your company, a founder needs to be able to clearly communicate their ideas. And as communication goes two ways, they should also be up for listening to constructive criticism or totheir teammate's opinions and working on it effectively.
Not a quick mover - Founders must be able to make quick calls and be action-oriented.
How to pitch to angel investors
1. Start with passion and drive
What is your story and why should somebody listen to you?
You need to grab people’s attention and tell them how much value you’re adding to the conversation.
Nobody wants a boring presentation, they want to know where you come from, what are you up to, and where you want to go from here.
2. Be clear about the business's mission
It is critical to be able to demonstrate why you started your company, who it is for, and where you want to take it. Some questions that you should be prepared for:
- What gave you the idea?
- What problem are you solving – and more importantly, how are you solving the problem?
- Who are the people you want to help?
- What is the purpose and vision of this company?
3. Get the facts and figures in order
Passion, purpose, and a great idea will get you so far, but there are logics and math that also play an important role, even if you’re just starting out.
You must be able to persuade them that your company has the potential to grow and scale significantly.
Read more about popular angel investors & their portfolios.