What to Look for in an Angel Investor
Angel investors are not all the same, the money is green, but the person behind it can add or subtract from your business. Choose wisely!
Hi, it’s Colin from Take Rate. Welcome! I started this newsletter to share startup and marketplace advice for operators by operators. Content is best shared with others, so feel free to share, and if you have any questions, leave them in the comments below!
Money is not just money when it comes to angel investors. Finding the right angel investors can be a game-changer if you're a founder or entrepreneur seeking funding. They can help catalyze your fundraising round, regardless of the check size.
Money can be a commodity, but a person is attached to it, which can enhance or detract from your business. It is important to choose only those who will help to improve your business and create leverage on the money they put into it. Once you invite an investor onto your cap table, it is very hard to uninvite them. Choose wisely!
A few weeks back, I shared a post fromI wrote specifically to share with angel investors that writing small checks is accepted and can have a big “money multiplier” for companies through introductions, other checks, and more. This post focuses on the founder and operator side and what they should look for in an ideal angel investor.
What to Look for in an Ideal Angel Investor
Industry/Sector/Business Model Expertise: You want an angel investor who knows their stuff regarding your business. Someone who's been around the block with your business model and has connections in your industry and/or sector. Otherwise, they might be more lost than you are, so you should generally ignore their advice. You want someone that will be valuable business development connections and introduce you to potential customers.
Skill Expertise: You want an angel investor who potentially has complementary skill expertise. So, for example, if you are a technical founder who has never been exposed to Sales or Marketing, you could benefit from angels with strengths in those areas. They also can typically help you to hire the best talent in those areas.
Founder/Operator Experience: Those who have done it before can provide high leverage as they help you to access all the cheat codes. Andrew Arruda, the Founder, and CEO of Flexpa, notes that this is a very valuable trait. Still, sometimes people with prior experience can cramp the thinking of a founder telling them “the way it is” when that might be stale advice. Familiarity is important, but they should most likely not be part of the status quo.
Network: You need someone who knows people and preferably the right people. An investor with a strong network can help you make connections and open doors. They should be able to introduce you to potential customers, partners, candidates, and other investors. This is one of the largest potential value adds for any investor, from angels to VCs.
Strategic Thinking: You don't want an investor only in it for the quick buck, notoriety, or whatever vapid reason. You need someone who can see the long-term potential of your business and help you build for the long run. Success is a low probability, and it will always take longer than everyone expects if it happens.
Communication: A good angel investor should be able to talk with you without using fancy buzzwords or jargon. If they can't explain something to you in plain English, they probably don't understand it themselves. They should proactively give you feedback on your investor updates and be supportive and helpful.
Shared Vision: You want someone who shares your vision for the future and your business. Someone who's on the same page as you and won't try to steer the ship in an opposing direction when the going gets tough (unless asked to help or required to do so). This also means they aren’t trying to be in control constantly.
Financial/Metrics Savvy: You need someone who understands numbers, not just how to count their money. They should be able to give you a POV on your business performance compared to what they see elsewhere. One of the best parts of having investors is that they get to see other businesses, and if they have good pattern recognition from that, they can help you to see where your business is succeeding or failing.
Chemistry: You'll spend a lot of time with the investor on your cap table, so finding someone you get along with is important. Someone who is there for you and doesn't take themselves too seriously can crack a joke or two when the going gets tough. Ideally, this investor is someone you can call up anytime to get advice or help, and you feel comfortable talking with them day or night.
Moves Fast with Existing Terms: You want to look for Angels that can invest quickly, after reasonable diligence, and that come in at your existing terms and won’t create a headache for you or future investors! Special treatment should be avoided as other investors will see it and ask for the same treatment, whether warranted or not.
Money: Big or small checks; the bottom line is they need money to invest. They also need to be at least accredited investors in the US. They ideally are also quick to sign, wire, and get you the capital to build and grow. At the end of the day, it is just fine if an angel is going to give you money and generally be passive.
While there are main traits and experiences to look for in an angel investor, there are also things to watch out for which are just as critical.
What to Avoid When Picking an Angel Investor
Looking for positive patterns is important, but identifying the antipatterns is also important. I cover a few, but there are certainly more that I would love to learn about.
Information Seeking/Pestering: Avoid angel investors concerned about having more information rights than others or asking too many questions outside of the diligence process and border on pestering. Any investor requiring significant management will be a serious opportunity cost on your time and prevent you from entirely focusing on the business.
Overinvested: Avoid angel investors who might over-invest because they worry about the investment and become information-seeking and pester you. Moreover, if they over-invest, they will likely be particularly sensitive to tough times for the business and be a drag on your time.
Reputation: Find ways to backchannel and learn about the investor's reputation. How have they been with other founders? Have they ever been a bad actor or are overly litigious? Once an investor is on the cap table, they are very hard to get off.
Finding the perfect angel investor might be like finding a unicorn, but don't give up! Keep looking, and you'll find investors who are just as passionate about your business as you are. Don’t settle!
Thank you to, Maggie Hott, and Courtney Powell for comments and feedback on my original tweet.
I would love to hear about your experience fundraising from angels. Please share your story and any insights that I might have missed.
What about stage mismatch?