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I have had the honor of working with New York Angels for the past year, and I honestly didn’t know much about angel investing prior. I had helped sell Cameron’s Coffee to private equity, so I was familiar with that process and I read a lot about VCs, but angel investing was foreign to me. I added New York Angels to my consulting portfolio as another client, but I had no idea what it would be like. Admittedly, I historically grouped all investors into the same bucket, and I didn’t understand the differences between each stage of funding.
But like any other role I’ve had, I spent the first 90 days learning as much as I could. I read Angel Investing: The Gust Guide to Making Money and Having Fun Investing in Startups and What Every Angel Investor Wants You to Know. I sat in on as many meetings as possible with members and founders. Over the last year, I connected with more than 100 angel investors and founders, and I learned how significantly different angel investing is from other early-stage investments.
1. Angels invest for the exit
Most angels are looking for startups with exit potential, not just a stake in a high-profit, high-revenue business. Consequently, angels will tell you if you will be more successful as a lifestyle business vs. one working towards an exit. Also, founders often start their businesses because they don’t want to answer to someone else. Angels will be the first to say that if you don’t want to answer to someone else, don’t fundraise (since you will be answering to them as shareholders).
That being said, angels usually will not interfere unless you want them to, but angels do expect an exit. If an exit is not likely possible, angels will guide you to consider continuing to fund your company yourself. Sometimes bootstrapping is the best idea; just ask Sir James Dyson and his £6.5 billion later.
2. Valuations can make or break a deal for angels
Angels are very sensitive to valuation because as many companies fail, angels need successful investments to produce 20x. Valuations can be extremely difficult to determine for early-stage companies because oftentimes there are no real benchmarks. Inevitably, the founder believes the company has a higher valuation, while investors will negotiate for a lower one.
The reality is whatever the valuation is, it must align with the company’s traction for founders and investors to agree and close the deal. Bigger also isn’t always better — a smaller valuation with a higher likelihood for a 10x multiple at exit is much better for all parties than a larger valuation with a minimal multiple or a lower likelihood of exit.
3. Angels hope for unicorns, but they don’t start out looking for them
From the outside, we often hear about the unicorns, but realistically, that’s not what angels look for when they invest. No one actually knows which company will become a unicorn. Most angels manage a diverse portfolio and invest in startups that have proven some sort of traction to greatly reduce their failure rate. Unicorns are called unicorns because they rarely happen. When they do, it has a lot to do with luck.
4. Angels are incentivized to help their founders be successful
Angels not only want you to succeed, but they relish being in the trenches with you (if you want them to) to help you succeed. Angels will often make themselves available to talk through issues 24/7, while others will serve on the board, sharing their advice, experiences and contacts. They can also be most helpful to founders through tough times because angels have seen permutations of the same issues across other companies in their portfolio or they have experienced these issues themselves in their personal ventures.
5. Angels invest for the payout result, but they often most enjoy the mentoring along the way
Almost every company goes through a major pivot at some point. When angels invest, they don’t know exactly what the company will become, but they do know the founder they are investing in (leading to the adage of investing in the jockey as opposed to the horse). Angels want to like the founder, and they want to work with them.
Mentoring is almost like a continuation of their own careers, as many angels have made their money by being successful founders themselves, like Marc Andreessen, the top angel investor, who founded Netscape, which was bought by AOL in 1998. In the final analysis though, if an angel can’t envision the reasonable possibility of a significant return, they won’t invest.
6. Angels are not playing with someone else’s money
When angels write a check, it’s their own money. They weren’t hired as part of an investment firm to use the firm’s money — every penny is their own. Angels also hope that when they do invest, founders treat it like their own money, too.
7. Angels look for diversity in founders but those who share similar values
Investors look for founders with a diversity of backgrounds because that leads to diversity in thinking and ideas. The angels who I have met are humble yet confident, hardworking, smart as hell and adaptable — all things that they similarly value in founders. Angels also are incredibly positive yet realistic, which is what founders need to be throughout the ups and downs of their business.
After talking with many founders who have exited or raised their next series, they often say they are so thankful for their angel investors. Angels gave them the first shot, frequently when no one else would.
Google recently celebrated its 25th birthday. In 1998, four angels (Andreas von Bechtolsheim, Kavitark Ram Shriram, David R. Cheriton and Jeffrey Bezos) invested in this early-stage startup that is now the eighth-largest company in the country. Google wouldn’t be Google today without angel investment. All in all, the most important takeaway that I’ve had from watching angels, is that angels are not just investors — they can be real-life angels.