4 investors explain how to get started in angel investing - and how to succeed once you're in it
- Angel investing is a high-risk strategy, and there are no guarantees it'll pay off.
- Four successful angel investors with varying areas of expertise shared insights with Business Insider into both how to get started in angel investing and how to succeed once you're in it.
- These experts recommended finding a niche, setting a budget, and keeping your expectations low to start out.
- They also suggested studying the landscape and reading books like "Zero to One: Notes on Startups, or How to Build the Future" by Peter Thiel and "The Hard Thing About Hard Things: Building a Business When There Are No Easy Answers" by Ben Horowitz.
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Angel investors participate in very early funding rounds for companies they perceive to have high-growth potential - typically pre-revenue and before they're backable by more traditional venture investors - in exchange for equity ownership interest. Oftentimes, angels have a deep passion for, and experience in, specific industries, which helps them get comfortable with the very risky capital they're deploying.
According to the 2019 Angel Funders Report co-authored by the Angel Capital Association and Hockeystick, the median pre-money valuation of an angel-backed deal in 2019 was $6 million, up 20% from 2017.
However, angel investors, generally speaking, provide more than just personal capital but also mentorship, advice, connections, insights, support, and more to early-stage companies.
But it's certainly not for the faint of heart. Four angel investors shared with Business Insider their expert insights into both how to get started in angel investing and how to succeed once you're in it.
Most angel investors have a background and interest in a particular category, which is where they choose to invest their time and money.
For Coco Meers, now the founder of Equilibria - a female-focused CBD brand - angel investing was a way to stay connected with early-stage founders after she sold her first company, beauty-booking app PrettyQuick, to Groupon in 2015. She missed the creative stages of building a business post-exit, and early-stage founders are often in the throes of creating their models and go-to-market approaches.
"Through my angel vehicle, Rebelle Collective, I invest in women founders who have demonstrated attractive customer economics in high-growth consumer markets," said Meers. Her investments include Ezza Nails, which is reinventing the nail salon experience; direct-to-consumer travel brand Paravel; and PearChef, a private chef in luxury apartments, among others.
Kim Perell, entrepreneur, national bestselling author, and tech CEO, became an angel investor to pay it forward to those who helped her get where she is today.
"As an entrepreneur, I know how lonely it can be," said Perell. "When I started my first company, I was broke and unemployed, and trying to convince anyone to lend me money was an uphill battle. Thankfully, my 80-year-old grandmother made a bet on me. My goal is to pay it forward by investing in entrepreneurs who need someone to believe in them. My passion in life is to support others in achieving their dreams."
She now works within the tech, real estate, and beauty spaces - and to date, she's invested in over 70 different startups, including Humin, which was acquired by Tinder in 2016; Gradient X, which was acquired in 2013 by SingTel for $20 million; and Adconion, which was also acquired by SingTel in 2014 for $235 million.
Chris Barbin had worked with six angel investors while at Appirio, an information technology consulting company, who inspired him to pursue angel investing after he exited the company three years ago to cofound SipTequila.com, a direct-to-consumer platform bringing hand-curated, super-premium and boutique tequilas to market in the United States. Today, he focuses on business-to-consumer (B2C) companies and small- and medium-sized businesses (SMB) after spending his career in business-to-business (B2B) companies and larger enterprises. His investments include Southern Grist Brewing, a Nashville taproom; YouBet.io, an online destination for horse racing; and PlushCare, a telemedicine platform.
"To me, what's most important is finding the intersection of a product or service I can personally get excited about [and] where I can have an outsized impact on their behalf," said Barbin. Basically, your relationship with a founder should be a two-way street in terms of benefits.
Phin Barnes has been a partner at leading early-stage investment fund First Round Capital since May 2012, which reportedly raised approximately $220 million between two new venture funds last year. He added that you should be clear about what you have to offer to founders besides money, and make sure the founders understand the product they are buying from you.
"This clarity will lead to more effective partnerships and help you build a group of founders who can serve as references for you as an investor," he said.
That said, Barbin advised angel investors to remember that entrepreneurs don't always necessarily want, or need, your unsolicited expertise.
"Don't be a 'board member' to an entrepreneur who you give angel money to," he explained. "Give them advice, guidance, and insights if they directly ask. But, if not, remember that, at this stage, they are probably running hard, fast, and are stressed enough."
Adopt the mindset of investing in people, not an idea
Barnes loves working with founders, and he believes that founders, not venture capitalists, predict the future needs of their customer, the future of the market they will dominate, or the future emergence of the category they will define. A good investor, he says, understands that.
"At First Round, we look to founders to teach us what's next," he said. "We were fortunate to invest in Uber before the rise of the on-demand economy and Roblox before games were social platforms. We invested in Blue Apron before everyone jumped into food tech and Notion before 'no-code/low-code' was a trend."
In all of these cases, Barnes met the founders when they were just starting out, identified with their vision, and believed in their ability to create and capture the market they were attacking.
"I look for founders with enough self-awareness to know they are trying to build an outlier company, but also to recognize that their work is a continuous battle for self-improvement and for growth as a leader and as a person," said Barnes. "I love working with the relentless founder with a clear vision, where I think, 'If anyone is going to win, it's this person.'"
Ultimately, angel investing is about betting on people - so backing those you trust and believe in makes all the difference.
"I look for entrepreneurs that are willing to put skin in the game, which doesn't always have to be monetary because they might not have the capital," said Perell. "I look for people with passion, tenacity, resilience, and energy to keep moving forward long after everybody else would give up, someone who knows how to execute."
This goes for the company's employees and leadership as well as its founders. Perell would rather invest in a great team and a mediocre idea than a great idea with a mediocre team.
"Two people can have the same idea, but the one who executes best always wins," she said. "It isn't about intelligence or education either. The key to finding success as an entrepreneur is execution. Execution is the ability to do and get results, to keep moving forward to achieve your vision and goals despite the obstacles that lay ahead. This one skill is the difference between success and failure."
Ask some tough questions about the company's potentialWhile it's easy to get excited about being part of a company's first stages, Meers said there are a few difficult questions you should ask yourself before you consider investing:
- Do you truly understand the financial model? Could this business ever really be profitable?
- Do you have conviction in the founding team? Are they truly the right team to beat the odds and make this company a success?
- What are the existential risks? What's lurking out there that could cause this company to fail even when the founders make all the right moves?
"It's not just about the passion in what they're doing but also what they are willing to suffer to achieve that vision," added Perell. This, she said, includes founders and investors taking the time to do the research and understand the commercial and financial models to know the risks involved in starting a business. She also bets on entrepreneurs who have tried to exercise their idea and can provide two proofs of concept or pilot programs.
"If an entrepreneur does not understand their market, the demands, or the challenges, I would not invest in them," she explained. "The most successful companies and entrepreneurs also have vision to stay ahead of the curve and understand changing dynamics."
Barnes likens divvying up your starting angel investments to a craft.
"When you commit to a craft, you should think about how much time and other resources you are willing to put toward building mastery of the craft," he said. "Think of the total budget as tuition rather than an investment that will generate returns and identify a number that is comfortable for you."
Early on, he suggested making more investments rather than making larger investments. "In fact, I think the best thing to do is make every investment a standard size rather than allowing your excitement level at the time of investment to dictate the amount of money you invest," said Barnes.
Don't just make one investment either, he added. "When you first get started, you are much better off writing 10 small checks than two or three bigger ones. You will learn more with repetition and breadth of experience. The odds are that your first check won't be going to a category-defining company, but it is the best way to learn about the process of angel investing and what it's like to work with founders," he explained.
Perell said that the typical angel investment is anywhere from $25,000 to $150,000. Like Barnes, she recommended building a portfolio of a minimum of 10 investments, in order to have a diversified portfolio.
On average, Barbin said that his personal investments range from $25,000 up to $250,000. "We set multi-year goals with our long-time trusted financial advisor for these higher risk 'personal venture' bets versus philanthropy versus a more traditional portfolio management approach, which, in our case, is relatively conservative overall," said Barbin.
There are no guarantees in angel investing, so for Barbin, any returns are 100% upside, no matter how small.
"Set a budget as a percent of your net worth, and stick to it," he said. "If you subscribe to the 'they all go to zero' rule [that the investment won't pay out], then it's probably 10 to 20% at most."
Meers agreed that angel investing requires being willing to take some big risks - and accept some financial losses. "While I'm always optimizing for return, I've certainly said goodbye to some checks," she said.
Generally, Perell said, the company seeking investors will disclose who else is investing. "You can understand more about the entrepreneur by understanding who their investors are," she explained.
Meers added that equity is an expensive form of capital for founders to take on. "The tradeoff that founders are making is that the investor partners are bringing a myriad of skill sets to bear that will ultimately increase the odds of success, from network and strategy to operating advice at scale," she said. "Understanding who the other investors are in a deal is therefore an important data point to understanding what tailwinds the founders have on their team."
Barbin said that aspiring angel investors should look for other successful operators or proven angels in the round by investigating them via LinkedIn, Crunchbase, and on social media; noting the deals they've invested in in the past and how they've trended; and speaking directly to entrepreneurs or CEOs who've worked with them previously when considering whether to invest.
And, he continued, stay away if the other angels are, for example, aunt Betty, uncle Billy, mom, dad, and you. "If the other investors are all family, the plan and business may not have gone through any level of rigorous diligence, questioning, or vetting," he said. "This is not always a bad sign, but it does up my level of investigation and diligence."
Finally, he added that if you have access to an amazing company that happens to be later stage, there's no reason not to invest as an angel in later rounds. "It can often be easier for the founder to find room for you in a later round," he explained.
Study upAngel investing is typically the riskiest type of investment for investors, so Perell recommended starting in areas where you're savvy and have expertise and also joining online angel investment groups like Angel List and Angel Capital Association.
Barnes suggested reading Nike creator Phil Knight's memoir "Shoe Dog" as a "great reminder of how long it takes to build an enduring business and how hard it is." He also follows the writing and movements of investors Ron Conway, Reid Hoffman, Marc Andreessen, and Jim Goetz and is a fan of "Zero to One: Notes on Startups, or How to Build the Future" by Peter Thiel and "The Hard Thing About Hard Things: Building a Business When There Are No Easy Answers" by Ben Horowitz, touting the books as "must-reads for angels and entrepreneurs alike."
Barnes' company First Round also offers Angel Track, a program that brings together a community of established operators and founders looking to develop their skills and identities as early-stage investors in San Francisco and New York.
"They hear from the best in the industry and learn that investing is about more than just writing a check," he said. "It's about being a resource for feedback, advice, and capital to founders."
He added that "Regardless of the entry point, whether it's Angel Track or programs like it, angel investing is what you make of it and the best way to start is to write that first check."