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Neil Patel

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Angel investors are a significant part of the startup ecosystem. If you are an aspiring entrepreneur or founder of a young startup you may be thinking about fundraising with angel investors. Here’s what you need to know…

Angels are a key element and building block in starting fundraising. They can be one of the most critical sources of funding for startups. Before you rush out there with your new pitch deck to try and present to them, make sure you understand how they fit, what drives them, and what’s next.

What Are Angel Investors?

Angels are investors who invest in startup companies as capital partners. The term refers to individuals who participate in funding new companies and business ideas. However, we have also seen a substantial rise in the number of angel groups. These are groups of angel investors who all invest together for efficiency, impact and lower risk.

If your startup needs any funding at all, then angels are going to be an essential part of this. Make sure you’ve got a handle on them before you try putting a business plan in front of them. Below is a video where I explain in detail how angel investors and angel groups work.

Angel Investors: Where They Fit In

If this is your first time raising money for a startup, then it is important to know that you don’t just land all of the money you need in one lump sum.

Even the tens and hundreds of millions you hear about others raising in the news and on tech blogs are just temporary financing to get through the next few months ahead. So, this is a critical step for your success. Everything may be riding on it. Yet, to put it in perspective, it won’t be your last round.

Angel investors are early-stage investors. They will be among your first investors. They may be participating in your friends and family round. They might be your friends and family. Or they’ll come in just after that to provide a bridge to your next early rounds. This is partially due to their appetite for investments, level of sophistication and desire for returns, what drives them and their check sizes. 

Angels may participate from the seed stage to Series B of your business funding rounds, though they may already be effectively priced out by your Series A due to the amount of money you are raising at that time.

Who Are Angel Investors

In many cases, you might feel like they are actually angels. Especially with the passion you have for your project at this point, and after spending months shopping for funding. 

These individuals may include:

1) Personal contacts, friends, family and their friends

The easiest people to raise money from (especially in the early days) are personal contacts you already have. Friends, family, their friends, past coworkers and bosses, and college buddies. People you already know. People who know you. People you have a relationship with. You don’t just want their money. You want to bring them along for the ride and to enjoy and participate in your success.

They can also be the most forgiving and patient when things are going slow and not as planned. You also have the advantage of knowing how they are and how they react to certain situations.

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2) Cofounders and silent business partners

Some founders have said they only want to bring in cofounders who are going to participate financially. They may even make their shortlist of candidates compete to get involved. Who is not only going to bring talent and be there for the ride, but also bring in the most capital to make it happen? Or maybe it is just minority owners who invest their capital and remain silent partners. Just make sure you structure this well legally so not to jeopardize future fundraising efforts and the terms you can get.

3) Former entrepreneurs and founder of new startup accelerators

Several notable entrepreneurs have gone from operations to launching startup accelerators. Here they offer seed funding, introductions to later investors, learning, and a focused environment alongside your peers that will force you to make progress quickly. These are not always easy to get into by any means. They may take equity. Yet, few if any seem to have regretted the experience. Just keep in mind you will probably have to move to their location for a few months during the program.

4) Entrepreneurs with recent successful exits

Other entrepreneurs have just sold their ventures for hundreds of millions and even billions of dollars. They have a lot of stock and cash coming available to them. Few of those I’ve interviewed on the Dealmakers Podcast have cared much for splurging on fancy cars and boats. They’d rather head off to a cabin for some quite for a while, spend time with family, and take their time to think about new projects.

Many don’t go at it again for another year. They know they need to diversify their money. They are also very comfortable with this space. They bring a lot of experience and connections that can help others go fast and succeed too.

5) Previous bosses and investment partners from venture funds

Your current or old boss may be one of your ideal first investors. If they aren’t already prompting you to go do your own thing, tell them about your ideas. They may want to invest in you and encourage you to take the leap.

6) Celebrity entrepreneurs like Mark Cuban

It may be a long shot, but there are great stories of others who have landed sizable investments from angels like these. It could be from getting on one of those TV shows. Or it could be a cold email or Tweet.

7) Regular individuals with significant amounts of capital to invest

Most often, when entrepreneurs are seeking angel funding they are looking to accredited investors. These are high-income earners and those with a high personal net worth. It’s worth pointing out that there is a lot of competition for their attention and money. Billions are being spent on marketing to them to capture their capital every year.

You may also raise from individuals who are not accredited investors if you are raising through crowdfunding portals and certain SEC regulatory filings.

While this fundraising strategy can add extra steps, cost and time, it opens up your round to a far, far larger percentage of the world’s population. You can tap those who are most passionate about your mission and product. You can use it to create early users and sales and brand ambassadors. It increases credibility and visibility. 

Why Do They Do It?

Understanding your prospective investors is just as important as deeply understanding your customers. Probably even more so. As if you don’t connect perfectly with your angels, you may never make it to the stage of gaining customers.

Angels can be driven to invest in this way for a variety of reasons, including:

  • It’s trendy
  • They want to look smart and get bragging rights
  • It can offer very high returns
  • It’s fun and exciting
  • They really want to help you
  • They believe in the mission and want to help in any way they can
  • This is a staple part of their investment portfolio
  • They are trying to give back after having a successful raise for and exited a startup themselves

What Do They Want? 

Put simply, they want to look and feel smart, feel like they are making a difference, have the opportunity to generate great investment returns and be able to rationalize why they aren’t going to lose this money they invest with you.

Some angels are very business savvy and experienced in the startup world. Others aren’t and are just dipping their toes in now.

Being very early days for your startup the number one deciding factor on whether to invest or not is you. Do they like you, want to help you, are inspired by you, and believe you can do this and will stick it out?

The business idea is secondary to this. Yet, it also has to make sense. Are you demonstrating that you’ve really thought it through, know how it could fail, know your competition and have differentiation and a competitive advantage?

Is this a really big market that has the potential to 10x or 100x their investment? 

Are you coachable and willing to learn and hire the best team and M&A advisors to see this thing through?

What’s Next, After Your Angel Round?

Almost as soon as you are closing your angel investment round, you need to be back out there preparing and raising for your next round. 

You also have to keep the business growing and show great use of these funds, and that you are gaining customers and results. Though at least half of your time is probably going to be spent on raising the next round. You need a new pitch deck and pitch, you need to be asking for introductions, be networking and setting the stage for the ask. You might find this a critical time to hire a fundraising coach to get you to this next level.

Remember that storytelling plays a key role in fundraising. This is being able to capture the essence of the business in 15 to 20 slides. For a winning deck, take a look at the pitch deck template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

What If Your Angel Round Fails?

You never fail unless you quit. Though it can absolutely take a lot longer to raise a fundraising round than you think it will. It may be longer than you think you can survive without new money. So, what do you do? 

Maybe the market is in a tough moment. Maybe you are ahead of your time. Maybe your pitch deck and presentation just isn’t cutting it. Or investors may be focused on a totally different model. 

If you haven’t had at least 301 investor rejections yet, then you may simply have not been out there asking enough.

In some cases, you may need to buckle down for a while and just bootstrap it. That has advantages too. It may take longer to grow. Yet, you’ll be hyper-focused on getting the most out of every penny and getting everything right the first time. Once you have proven your concept, achieved product-market fit and are profitable, you’ll have plenty of investors lining up to give you money and bigger companies wanting to buy you out. 

If you can’t run that lean, then you can borrow. If you have some track record of revenues then you should find business credit cards, business lines of credit, equipment financing, merchant advances and other loans available to you. 

You may also be able to ‘founderize’ some key team members. Offer those who can afford to miss a couple of paychecks stock options and equity for sticking it out and helping you get through until the funding comes in. 

Who knows, if you do these other things right you may be able to leap right to an acquisition or VC and strategic funds, instead of holding out for angels.

Notable Angel Investors Who Might Fund Your Next Startup Venture

  1. Keith Rabois 
  2. Will Herman 
  3. Scott Belsky 
  4. Rick Marini 
  5. Charlie Songhurst 
  6. Brad Harrison 
  7. Gary Vaynerchuk 
  8. Clark Landry 
  9. Wayne Chang 
  10. Dharmesh Shah 
  11. Mitchell Kapor 
  12. Ullas Naik 
  13. Raymond Tonsing 
  14. Kevin Mahaffey 
  15. Elad Gil 
  16. David Sacks
  17. Matt Mullenweg 
  18. Fabrice Grinda 
  19. Paul Buchheit 
  20. Wei Guo 
  21. Alexis Ohanian 
  22. Scott Banister
  23. Naval Ravikant 
  24. Daniel Curran
  25. Marc Benioff 
  26. Mark Cuban
  27. Simon Murdoch 
  28. Ron Conway 
  29. Esther Dyson 
  30. Kevin Moore 
  31. David Tisch
  32. Dave McClure 
  33. Semil Shah 
  34. Max Levchin 
  35. Jason Calacanis 
  36. Benjamin Ling 
  37. Brendan Wallace
  38. Tim Draper 
  39. James Sowers 
  40. Auren Hoffman 
  41. Lee Linden
  42. Joanne Wilson
  43. Farzad Nazem 
  44. Joshua Schachter 
  45. Garry Tan
  46. Rajan Anandan
  47. Xavier Niel
  48. Dave Morin
  49. Jose Marin 
  50. Reid Hoffman

FULL TRANSCRIPTION OF THE VIDEO:

Hello, everyone. This is Alejandro Cremades. Today we’re going to be talking about angel investors and also super angels. Angel investors, at the end of the day, are going to be those individuals that are going to be investing in the early stages of startups. Angel investors, you’re going to find them in different flavors. You’re going to have the angel investor itself. You’re going to have the super angel, and you’re going to have angel groups.

As a fun fact: angel investors, the term comes from those that used to finance the Broadway shows. These people were putting in money and not expecting anything in return. That’s why they’re called angel investors because, obviously, those investments were not so lucrative.

When it comes to angel investors, those are individuals that are investing in a company for many different reasons. Either just the returns, paying it forward, also because many of these guys have been entrepreneurs in the past, or maybe to go to a dinner and be cool in front of their friends and family. 

The other thing, obviously, is to diversify their portfolio. Typically, angel investors, the allocation that they put for risky investments like startups is not more than 5% of their portfolio. 

When it comes to the different types of flavors of angel investors, you have the individual angel investors. Again, those angel investors are not the ones that have the title Angel Investor on social media platforms like LinkedIn or Facebook. Those individuals are only going to be putting a very small ticket, and they’re going to be a waste of your time. I highly, highly, highly recommend that you stay away from those.

The angel investors are senior executives in big companies. They are highly successful entrepreneurs that are looking to give back, or perhaps like some other individuals. It could be service providers like lawyers, accountants, or people like that who are looking to put some money here and some money there.

When we go to angel groups, those angel groups essentially were brought into place so that those senior executives could have a place where they could meet and where they could also discuss potential deal flow.

Now, with the internet, those angel groups are not needed as much as they were needed before because now you can get access to all types of investment opportunities. We live in a world that is super connected and very transparent. For that reason, I think angel groups are not on the high rise as they used to be. Perhaps they have maintained themselves there, but again, they’re a great way for entrepreneurs to go pitch their business, and to perhaps get some money.

Angel groups, you’re going to find in different regions. You’ve got, for example, the New York Angels, or the Houston Angel Network, just to name a couple. But basically, the way they work is that you go, you pitch to them, or perhaps at first, you submit your application, or you get referred by someone. Then what you do is that you go and pitch in a pitch screening type of environment.

If you pass that pitch screening, then they will pass you over with some Q&A along the way, and with some due diligence, they would pass you on to what is called the actual get-together, the actual gathering of all the angels. They do this perhaps once or twice a month. What that means is that all the different members of that group are going to come together and they’re going to invest in those companies.

The way that those investments work or the way that it happens is that either it can be a direct investment from the individuals themselves. It could be an SPV, which is a Special Purpose Vehicle, which is like an LLC, but a way to group all of the investors and to make those investments in the business as one rather than having multiple different individuals in your cap table, which is what records who owns what in the business. Otherwise, it becomes a cap table mix or a spaghetti mix.

The other way in which they’re going to be making those investments is via a VC or a fund that they’ve created together. This is something that we’re starting to see more and more as we go because people are starting to be more sophisticated where it comes to the ecosystem and the universe of investing in startups. 

The other angels or the other flavor of angels that we are seeing are the super angels. They are super-wealthy individuals. You typically see those that have been an entrepreneur in the past and that were able to get a really nice acquisition of their business. Now, they have a lot of capital to invest in companies.

Those individuals are investing from as little as $250,000 all the way up to 4 million dollars. They could either make the investments directly themselves or they have perhaps a family office, which is more like an entity that they have created with an investment team that is bringing all the different opportunities and placing bets on these different companies they think have potential.

Those are the super angels. In many instances, you have super angels maturing into becoming venture capitalists or perhaps those who open their own firms. You’ve seen examples like Peter Thiel, who put the first angel investment in Facebook. Now he has a VC firm and others, as well.

Those are the ones that are going to be placing the biggest checks. The angel groups, again, it ranges. It can go all the way up to 2 million. The angels are putting a little bit smaller checks, so that could be from as little as the LinkedIn angel investors, which are going to be putting $5,000 to the ones that are real angels that are going to be putting anywhere between $25,000 to $50,000. In some instances, you would see that going up to $100,000. That is the way that those different angels and the different flavors for channels in which they work. 

Angels, for the most part, are investing in two rounds of financing, so one is the seed stage level. That first round that you are raising money for your business to get it up and scale it up. 

Then the other one is going to be the Series A. The Series A is more as a way to continue expanding to achieving more milestones. But the Series A Round is where you start to see that blend between the angels, then the VCs, and then the VCs take it on, and they continue to invest with perhaps private equity firms down the line.

Something that is important is that when the angel investor invests, let’s say at a seed stage or at a Series A they’re going to continue to execute on maintaining their equity ownership. They’re going to do that via certain negotiations or certain clauses that they’re inserting in their agreements. That is the pro-rata rights, as an example. 

What that gives them is access to continue investing to maintain the position as the company matures because if they’re investing now, and they put $20,000 to $25,000, and they see that the company continues to be successful, then let’s say at a Series A or a Series B level, they have a certain right to continue investing so that instead of having, let’s say, their 10% going down to 1% or 2%, they can continue to invest so that 10% continues to be 10%. Even though it’s a higher valuation, but perhaps that equity ownership is super important for them to keep.

That’s the way that the angel investors work and the different flavors that you have in place, so if you like this video, please feel free to click Like. Also, subscribe or comment. Then take a look below at the link on our fundraising training where we help entrepreneurs from A to Z with everything related to fundraising. Thank you so much for watching.

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Neil Patel

I hope you enjoy reading this blog post.

If you want me to help you with your fundraising, just book a call.

Book a Call