What Do Angel Investors Actually Do? (Part 1)

For a long time, I wondered what a day in the life of an angel investor looks like. How do investors and startups get introduced? What kind of information gets exchanged before and during meetings? How are decisions made? What happens after an investment? This post is an attempt to describe some of my recent experiences from the investor's perspective. This is not meant to be authoritative or comprehensive, but instead to provide a good high-level overview for those who are interested in startup investing.

At a high level, angel investors have handful of responsibilities:

  1. Find companies that look like good potential investments.
  2. Talk to said companies.
  3. Convince the more promising companies to take your money. (No, really.)
  4. Offer advice and introductions to existing investments.

I will cover the first two points in this post and last two points in the next post.

Looking for Prospective Investments

Okay, your business card says Angel Investor. Now what?

The first thing you need to do is to find companies to invest in. This is referred to as deal flow. If you don't have any potential deals to evaluate, then there's nothing for you to do.

So how do you find potential investments? There are many viable approaches:

Talking to Companies That Seem Promising

Great, it looks like you found a few companies that you'd like to talk to. What should you talk about? At a high level, the main goal of talking to a company is mutual understanding. The investor's goals are to understand the startup's mission, the problem that they're trying to solve and how they plan to solve it, who the competitors are, and so on. The startup's goal is to raise money (obviously), as well as to figure out if the investor is a good match: do they have the right connections? Are they a short-term investor or someone who's in it for the long haul? Do they have any valuable-industry specific knowledge or experience? Investments ideally happen when there's a good mutual fit between the investor and the startup.

Some specific things investors consider:

Next week, I'll discuss how and why investors sometimes have to convince startups to take their money, and what happens after an investment is made.

* A startup's valuation is what it claims to be worth. For example, if a startup is raising $1m at a valuation of $10m, then that means they're claiming to be worth $10m and are selling approximately 10% of the company for $1m. The valuation is typically determined through some combination of the strength of the founders, the current state of the product (idea vs. prototype vs. in production), current revenues (if any) and costs, projected revenues and costs, the size of the target market, optimism, and moxie. (Valuations are either reported as pre-money or post-money valuations. I don't want to get into the technical details, but if you want to understand the difference between the two, the Wikipedia article is quite good.)

** An investor's thesis is their investing philosophy. This might be something generic: "I invest in companies which have great founders with proven track records." It could also be very specific: "I believe the future of medical devices is the use of QR barcodes and RFID tags, and I invest in health startups that use those two technologies creatively."

Tags: Angel Investing

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