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Updated August 29, 2023You’re reading an excerpt of Angel Investing: Start to Finish, a book by Joe Wallin and Pete Baltaxe. It is the most comprehensive practical and legal guide available, written to help investors and entrepreneurs avoid making expensive mistakes. Purchase the book to support the authors and the ad-free Holloway reading experience. You get instant digital access, commentary and future updates, and a high-quality PDF download.
To have the opportunity to make a good investment, you have to see a lot of deals.
Deal flow refers to the number of potential investment opportunities you review during a particular period. Ideally, if you are active, you will have the chance to review, if not all, a substantial portion of the investment opportunities in your particular area.
founderIf you’re new to angel investing—or a founder looking for ways to get in front of investors—here we include some recommendations on how to get access to deal flow.
There are a number of benefits to investing in local startups. When considering making an investment, you may want to visit the startup’s office, talk to key team members, and perhaps see a demo of a not-yet-released version of a product. You will want to get to know the CEO over the course of several meetings. Many of these activities are more easily done if the company is within an easy drive.
Once you’ve decided to move forward with the investment process, being physically close to the company makes it easier for you to stay in touch with the CEO over the occasional lunch, and perhaps introduce them to potential local hires or customers. In the event that things go poorly with the company after you invest, or they are unresponsive to your inquiries, you will be able to just go to their offices and talk to them. Finally, by investing locally, you will be helping your local startup ecosystem.
You can learn more about investment opportunities in your community through the following channels:
Angel investing groups. Angel investing groups are a great place to get exposed to potential investment opportunities. We discuss this in detail in Joining an Angel Group.
VCs. Introduce yourself to the early-stage VCs in your town. Let them know you are looking to invest and ask them who the prominent local angels are.
Accelerators and incubators. Research the local startup accelerators and incubators and introduce yourself to them. You can offer to be a mentor if you have the time, but at a minimum let them know that you are an accredited investor looking to make investments and ask to be invited to their demo days.
Universities. Many universities now have entrepreneurship programs, and they may be open to having local angel investors attend their demo days or meet with their student teams to provide feedback and advice.
Meetups. Meetups are a good place to get to know entrepreneurs. There are a surprising number of meetups focused on startups. In addition to searching Meetup.com for “startups” or “entrepreneurs,” try some of the hot topics in the startup community such as “lean startup” or “lean analytics.”
Co-working spaces. Co-working spaces are also an excellent place to find startups. In many cities there has been a proliferation of co-working spaces targeted specifically at founders. Check the calendars of these spaces, as they often have events where you can begin to network into that community. In many cities you can find local chapters of startup-centric organizations like Startup Grind that put on regular events that cater to entrepreneurs.
If you don’t live somewhere with a robust startup ecosystem, or if you are looking for startups in quite specific technologies, you may have to look more broadly.
Let your network know that you are interested in making angel investments. Mention angel investing on your LinkedIn profile. You will be surprised at how many people reach out to you. You can also join investor-centric networks like AngelList, where many entrepreneurs may be looking for investors who share an interest or expertise in their industry.
Whether you are interacting with the local startup community or creating a profile on a national site like AngelList, it will be helpful to have an elevator pitch about the types of deals you are interested in. You might be interested in a particular industry or technology focus or a stage of company. Communicating your desired focus will help get the right deal flow while minimizing the noise.
Alternatively, many angels prefer to remain as anonymous as possible. That is fine too. There is really no wrong way to go here.
Do you know what the key success factors and milestones are for a medical device startup? How about a messaging app targeted at teens? Do you know how long it takes to sell an enterprise software solution to Fortune 500 company CIOs? You will be a more effective investor if you understand the market and/or technology that is the focus of the startup.
importantIn 2011, Rob Wiltbank of the Angel Resource Institute completed a study of angel investments made by members of angel groups.* He found that angels had a 60% better return on their investment when they invested within their area of expertise. So stick to your knitting!
Why? If you have had a career in enterprise software sales, you will understand intuitively the challenges in selling in that market. You’ll know how potential customers evaluate solutions, allocate budget, calculate ROI, what their risk tolerance is, who the influencers are, how long the sales cycle takes, what supporting proof is required, what marketing techniques are effective, and so on. You will have colleagues and friends in the industry that you can contact to litmus test some of the assumptions being used by the startup you are considering. You will be in a much better position to evaluate an idea, scrutinize the team, gut check the financials and perform effective due diligence if you are looking at companies in an area you know something about.
If you do decide to evaluate companies in areas outside your expertise, it makes sense to do so with the support of an angel group or someone in your network who does know the industry well. You can lean on the knowledge of other angel investors, but it will always be easier if you yourself know—or are at least willing to learn—what questions need to be asked and can converse with a founder intelligently.
Of all the opportunities you’re likely to come across, how do you narrow your list down to the companies you’re willing to spend the time and effort of due diligence on? There is an ongoing debate among venture capitalists and angel investors about what is most important in determining the likelihood of a startup’s success: a strong team, a big market, or a compelling idea? They are all important, so we will cover how to evaluate all three below.
Ideas are everywhere, and there are very few unique ones. There is a long road between the idea and an actual compelling product, and longer still to a revenue-generating business (and longer still to profits!). It is the team that is going to build the business out of the idea, so you should be as confident as possible that the people pitching to you are going to be able to execute. Many believe that one of the best predictors of success is an entrepreneur who has built and exited one or more successful companies. Absent that scenario, below are some key things to consider after hearing the pitch. (We’ll address team issues in more detail in Business Due Diligence for Angel Investments.)