The Secret Life of Angels: Raising an Angel Round for Your Startup

A lot of people come my way when they start thinking about raising money--either because I used to work for a venture capital fund or because my company, Path 101 just completed our 350,000 angel round.

Without fail, the first question is usually, "Who should I go to?" Many people feel that, especially in NYC, angels willing to invest in early stage deals are hard to find. The entrepreneurs attend "exclusive" networking events to meet angels only to discover that few investors actually attend these events and those that do are often not looking at things in your stage or area.

These are the last places you should look, as far as I'm concerned.

It's the same thing as trying to meet someone great in a bar...   Sure, it happens, but the odds are against you.  They don't know you, you don't know them.   You don't have any idea what the other person is looking for, what they value, or whether they're even really in the market at that moment.  Maybe they're just getting out of a bad relationship, or in an angel's case, just lost some money in a bad deal--in your niche, too.  Plus, in general, there are way more potential angels NOT going to angel events than actually going.  Similarly, the number of single people far outpaces the number of people who hangout in the hottest singles bars and clubs.

There are a few keys to improving your odds with angels, and this advice, not surprisingly, works with dating, too--the big difference is that one of these activities makes you money and the other is likely to burn a hole in your pocket.  :)

First, you want to start a lot "closer to home".  Who knows you the best?  Who trusts you?  Remember that the requirement for an angel investor is that they be accredited investors.  These are basically either insitutions, or if they're individuals, they need to make over 200k a year (300k for couples) or have a million bucks of net worth.  What they don't need is a shingle on their door or business card that says "angel investor".  An angel investor might be the person in the neighborhood you grew up in who owned the biggest house--someone who knew you and your family from a religious organization perhaps.  They could be your previous or current employer, or their boss--just generally someone who knows you well enough to think that you can be trusted, that you'll give it your all, and that you have the skills to succeed.  These should be the easiest people to convince that you're worth backing--and other angels are going to want to see this.

Should that mean family?  Eh...  I don't know about that.  I think you're going to need your family for support, emotional strength...   You're going to need someone to turn to do say, "Wow, things are going really bad, I'm really worried." and I don't think you want to eliminate the possibility of being able to say that to your family, because they've got their retirement funds in your startup.

Depending on your industry (this of course might be tough if you're a social worker), I've often said that if you don't have enough industry experience and enough of a network to have at least $150k of relationships on your own, I'm not entirely sure how successful you're going to be in starting a company.  Even in the early going, it's really obvious how much success hinges on the company you keep.  There's just too much to do, too much to know...  I don't know how any entrepreneur who doesn't know at least a handful of more successful people than them can do this job, frankly.   You need to know people in the space who are willing to go to bat for you--those are the people likely to fund you.

On top of that, I can't overstate the value of industry expertise.  If a startup has literally zero connections to money, that probably means that they don't necessarily have a lot of experience in their particular industry. Otherwise, they would have known SOMEONE who made money in it.   In my mind, that's a problem.  Even the most disruptive business models require at least a little bit of industry know-how...  of nothing else than to know exactly how to be disruptive and deliver the deathblow to the old school companies in your space.  You need to know the landscape, how money flows, how value is created... 

And you get this experience not just by having any job in your space, but by actively being a leader in it--taking on responsibility, leading people like you with similar interests...  Again, also like dating.  Instead of always looking for dates, if you're just getting out there, being active in your social life and hobbies, you're more likely going to come off as the kind of person people want to spend time with--and in the angel situation, who people want to spend money with.  If you weren't a "entrepreneurial" before you started your company, whether in your hobbies, volunteer activities, student groups, professional orgs, what are the chances that you'll be successful in this startup--your first real leadership challenge?

So, ideally, you've got some connections to successful people in your own industry.  Your target angel list should include the top 30 most successful people you can find in your space--not that you want to include all of them in your deal, but you need to talk to a lot of people because you're going to get a lot of no's.  The biggest reason why you want these people in your deal is because they can vet your idea.  If you've got an idea for a retail concept, and the founder of Jamba Juice invests in your company, clearly that means a lot and that you're probably onto something.  You still could fail, but at least and "insider" has deemed your idea not to be completely stupid.  If you can't convince any of the 30 most successful people in your industry to back you or you can't even network your way to them, I'd say that's a big issue.

When you actually get in front of these folks, don't discount what they can offer besides just a check.  We got a ton of value from meeting with successful entrepreneurs before our round.  It was great when people inquired about the potential for investment, but even when they didn't, we learned lessons that were just as valuable. 

Someone asked me the other day how to ask?  Do you just come out and say it?  What do you ask for?  A certain amount? 

We tried to avoid asking as much as we could.  If people are interested, they're going to bring it up.  We just basically said, "Here's what we're doing... here's how much money we're raising...  We'd love to get any feedback you have." 

We meant that, too... can't overstate that.  It was great when people volunteered to write checks but you can't expect it..  Even though these were folks that obviously had the money, it's still a lot to ask for and angel investing is pretty risky.  We did, of course, nudge a few people when we really wanted them in and they didn't bring it up on their own.

As for size of the round, terms, etc...  we did find a couple of more sophisticated folks to guide us on things like the security, the price, and then we sollicated lots of feedback from others.  You don't want to have a 8 way (or in our case, a 20 way) negotiation on the docs, so if you can find a couple of folks to commit early, and anchor a fair round, that will make your life a lot easier. 

Number is a big question people have, too.  We had more than anyone else I know...20 people.  I wouldn't necessarily recommend it, but outside of all the paper shuffling, I'm so excited that we've got all these great people involved and helping us out.  Actually, the bigger question was how small an investment were we willing to take.  For what it's worth, we took a few 5's and 10's under the following conditions:  Did they add some kind of unique experience for value?  Or,  were they just nice people wouldn't cause us a lot of headaches to manage?  No reason not to take 5's otherwise, because they day may come when you're down to your last few grand and you'll be glad you took it.

Anyway... that's what we learned...  I'd love to hear lessons from others....

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