Mack Kolarich
Not all angel investors, and not all angel groups, are created equal. Some have built reputations for adding phenomenal value, being staunch allies of founders as startups scale and helping them source expertise or resources through their networks.
However, you also have some who are known for being cap-table nightmares, meddling, setting unrealistic requests or being downright unreachable when needed.
For many entrepreneurs, angel investors can play a key role regardless of whether they’re good or bad investors. In the current fundraising environment, the importance of angels has only grown. While terms in the first half of 2022 have remained founder-friendly, seed-stage valuations are reportedly declining, and some investors are taking longer to make decisions while expecting higher levels of traction at every stage of financing.
Angels are increasingly everywhere
One kernel of optimism for founders to bear in mind is that the state of “earliest-stage” capital has improved significantly over the last decade, with more angel investors and more venture funds than ever before. The Angel Capital Association reports 278 angel groups as members, with dozens more North American groups operating outside of the association (that’s over double the number of angel groups a decade ago). Europe’s investment community has similarly grown and matured, with the European Business Angel Network reporting over 60 angel groups across 41 countries as members.
While angel groups are easily identified due to public websites and formal investment processes, they actually comprise just a small fraction of the total estimated number of active angel investors. Many angels go it alone or invest with a small roster of friends outside of any formal group. The Center for Venture Research estimates there were 363,460 active U.S. angels in 2021 investing across 69,000 startups, up 2.9x from the 124,900 active angels reported in 2011.
Despite this growth, founders need to think carefully about their fundraising strategies and hunt for any investor insights or edges they can find in order to maximize their company’s potential. More angels also means more complexity, and entrepreneurs must navigate this complexity and determine which investors are actually worth the time and money.
How angels think: Determine their secondary motivator
Virtually all angel investors want to make money. While many of the best angels mentally write off their investment once they make it (recognizing the odds are long that they will ever see a return), they still hope to see their investment result in success. But beyond making a financial return, many angels have a second or third motivator driving them to invest in startups. After all, there are plenty of easier and more liquid ways to deploy capital than into startups.
As a founder, identifying these other motivators can help you better resonate with a prospective investor. Understanding an angel’s motivations can also help you assess whether you want that prospective investor to be a part of your company for years to come.
So what are the most common angel motivations, besides making money?
Pay-it-forward
These investors are entrepreneurs themselves. They understand the struggle and appreciate the audacity it takes to build a company. Whether they raised money for their own ventures, they’re inspired to “give back” and invest in their peers or seed the next generation of founders. Many of the most renowned angels fit this bill to some degree.
Fuel local economy
Some investors are heavily oriented toward economic development in their city, state or region. They have a strong geographic lens to where they’ll consider doing deals and want to see successful companies founded and scaled close to home. If you’re not local, they’re not interested.
Social change or mission-oriented
These investors are motivated by bringing positive change to the world via capitalism. They’re usually driven by a particular mission area, whether that’s climate change, alleviating poverty, underrepresented founders, women’s health or any other issue area. They often believe that the most sustainable solutions to society’s problems are also profitable.
Industry insights
Other investors are passionate about their industry or domain of expertise and see investing in startups in the same industry as a way to “see the future” and gain valuable market perspective. Often, these angels are actively working in the same field as your startup.
Communicating your company’s experiments and discoveries is greatly valued, as it influences subsequent investments as well as their own strategic decisions in their jobs. Chemical Angels, Space Angels and Healthcare Angels are just a few examples of organized groups focused on specific industries.
Boredom
Some angels are, quite frankly, just bored. They may be retired, pre-retired or simply unfulfilled with their day jobs and find angel investing intriguing. This “motivation” is a particularly risky one: Bored angels may bother you all the time or spend inordinate amounts of time on due diligence as a way to feel productive. If you’re faced with a 90-page due diligence questionnaire at your seed round or warned of a nine-month due diligence process (both real world examples we’ve seen), proceed with caution.
Their friends are angels
While this motivator can overlap with boredom, it has a distinctly social component to it. Some angels invest because their friends and colleagues invest, and they see angel investing as a social activity. This type of angel won’t invest on their own; they will be a part of an angel group or a small network. Angels motivated by the social aspect aren’t necessarily good or bad — they may be able to add significant value when needed or be hands off and just a check with a name.
There are certainly other motivating factors that influence angel investors, but these are the most common. Evaluating the motivations within angel groups is harder than for individual investors, as there can be many competing personalities.
However, you can research each member and try to assess what you think may motivate them. Pay particular attention to anyone listed on an “investment committee,” as they tend to have outsized influence on what deals are considered. Regardless of motivation, the best angels often have the least amount of time to spend with you but are willing to carve some out when you need it.
How angels invest
Let’s go ahead and ignore the tragedy of pay-to-pitch angel groups — these are much more egregious than VCs charging their portfolio companies for deal transaction fees — and move on to how angels actually deploy their capital.
How angels invest shapes your cap table, how many investors you need to wrangle signatures from and how many headaches you have to deal with down the road.
There are three general approaches to capital deployment in angel investing: direct, angel funds and SPVs.
Direct checks
This is literally a check (or more likely a wire) to your company, and the investor sits directly on the cap table. The money may come from the angel themselves, from a personal LLC, a trust or similar legal entity. But the effect is the same: Your company receives a series of small checks from individual investors.
Historically, this is how most seed and pre-seed rounds are funded. Check sizes can vary widely, and $25,000 to $100,000 is the stereotypical range for a lot of angels cutting direct checks. Some angels (and family offices that invest early) will make larger investments, while others might invest less.
This is where direct checks can become tricky: How many small investments are you willing to accept? Every investor you list directly on your cap table is someone who will (1) be “seen” by future investors conducting due diligence and (2) be a signature you will have to wrangle for certain activities.
I distinctly recall one angel group that only did direct checks and had an average investment of just $3,000 per member. Emphasis on average, because members were allowed to invest as little as $1,000 via direct checks. This particular group had a rule that if one angel participated in your round, you were required to let any member of that group invest any amount they wanted. Not all angels, and not all angel groups, operate equally.
Angel funds
Virtually unheard of 10 years ago, angel funds are becoming an increasingly common strategy for angel groups to deploy capital. It’s basically a VC fund, but it’s usually quite small (below $10 million) and may have friendlier terms to the “LPs” or angels who decide to invest in the fund.
Angel funds vary in how they operate, but it is common that the fund is an extension of the angel group. The group does its typical deal review process, and if a decision is made to invest, then the fund will deploy capital into the deal. The individual members of the angel group can often choose to invest additional capital of their own into a specific startup beyond the angel fund’s commitment.
Practically, the angel fund appears as a single position on a company’s cap table. You will have one or a couple points of contact with the fund (usually a managing partner or member), who will streamline any signature or support requirements.
SPVs
Special purpose vehicles (SPVs) are another mechanism angels and others use to invest in startups. It’s effectively a legal container that pools capital from multiple investors and invests in a single startup.
SPVs are used by both angels who invest “in the real” as well as those who invest online (via online investment platforms such as Republic, AngelList, Ourcrowd, etc.). SPVs are ideal for angel groups that have a number of smaller investors who want to participate in a specific deal. Because it pools everyone’s capital together, the investment appears as a single entity on the cap table, which simplifies investor communications and approvals.
Even for angel groups that write larger deals or a loose band of investors that syndicate deals with each, SPVs are becoming increasingly popular. These vehicles do have costs that are usually paid by the investors (such as regulatory filing fees as well as formation and accounting services). But in return, they help streamline the angel experience by handling accounting and liability needs in a cap-table-friendly format.
Choosing your angel
Once you’ve better come to understand angels — what motivates them, and how they think and invest — you can begin choosing the appropriate partner for your business by asking some key questions:
Is the investor well versed in the industry you are operating in? Are there any other companies in the investor’s portfolio that you could speak with as a reference?
Is the angel willing to actively participate in growing your product or solution, make introductions and go beyond just writing a check in order to ensure your company’s future success? Or vice versa, if the angel is not hands-on, are they hands-off in a way that aligns with your goals?
Armed with this knowledge, you can strategically select the right partner for your business.
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