2020 Beginner’s Guide to Bay Area Angel Investing

 
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About the author

Jeff Chang (@JeffChang30) is an angel investor and growth engineering lead at Pinterest. If your US based software startup is looking for an angel investor who can help with all things growth, please send over an email!

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Intro

I have had the privilege of partnering with many great founders as an angel investor and have started getting a lot of questions on how to start angel investing, particularly in the Bay Area. The angel investing ecosystem in the Bay Area is currently more competitive than elsewhere. In this post, I’ll share some tactical advice that I wish I knew when I was starting out. This post mainly applies to investing in Bay Area seed stage startups.

Topics in this post:

  • Helping founders

  • Access

  • Capital

  • Closing

  • After the check

Angel investing is all about helping founders

Angel investing is all about helping founders. If founders don’t succeed, angels don’t succeed. Also, if you don’t help founders, it is difficult to angel invest because founders usually have access to angels that can help. Helping founders improves other aspects of angel investing. It improves your access because founders who enjoy working with you will refer you to other founders. It improves your decision making because you will learn about what it takes to build a big company. It improves your closing because the best way to close is to have a happy founder send a glowing reference to a new founder.

So before you figure out access, decisions, and closing, you must figure out how to effectively help founders. What’s some value that the founder can get from you on their long journey? Founder needs vary, but your goal is to provide high and potentially differentiated value (can’t get from others).

The two most common forms of value add that angels provide are domain specific advice and network access.

Domain specific advice

Building a successful startup requires many different tasks (fundraising, hiring, growth, etc), which founders may be doing for the first time. If you have experience in any of these things, usually you can provide useful advice to them. For example, I help founders with growth since it’s an area that I have a lot of experience in. It’s very helpful to founders because every startup needs to succeed at growing. Advice is the most common form of angel help.

Network access

Hiring: Building a successful startup requires hiring a great team, which is hard for pretty much everyone. If you can help a founder hire an early team member, that’s a huge value add. This is one of the more rare forms of angel help since hiring at startups is hard.

Customer acquisition: This is similar to hiring, but instead of employees, it’s acquiring customers through network. This is also a less common form of angel help, but very valuable if you are able to provide it.

Intros to other investors and other services: This especially applies to first time founders, who may not know many investors. Investors usually know a lot of other investors due to collaboration. So, opening up your network to help fill the current or future rounds is helpful to founders. In addition, intros to lawyers, accountants, journalists, and others are also helpful.

Being a good cheerleader and friend: This is kind of a hard sell because it’s not differentiated, but is very important for all investors to provide in my opinion. Founders are people and startups are hard. Be kind and encouraging to founders!

Access

In my opinion, growing access to startups is the most important area for new angels to focus on when getting started.

One thought many new angels have is that access is mainly a function of network and brand. This is true long term, but early on, access is more a function of time spent. You need to put in the time to get access. This is both good and bad news. Bad news because you need to spend a significant amount of time to get a large amount of access, but good news because almost anyone can put in a large amount of time.

“Getting access to investment opportunities is the easiest of the three categories: you can just work hard.” - Sam Altman

5 tactical tips for getting more access

1. Go to YC demo day

Going to YC demo day is a must for new angels for a few reasons. First of all, it will make up a large percentage of your dealflow in the beginning. There are over 200 startups in the Winter 2020 batch. Next, it quickly gives you data on what’s available so you can develop a personal thesis on what you want to invest in. Third, it’s probably one of the easiest ways to expand your network since many investors are there. Apply here and apply early: https://www.ycombinator.com/demoday/

2. Reach out to founders you know

The easiest founders to invest in are the ones where you already have a relationship with. So, make sure to keep track of who you know that is starting a company. ~20% of the founders I’ve invested in are ones that I had previously known.

3. Reach out to founders you don’t know

The majority of the startups that I’ve invested in started with a cold reachout. In a way, angel investing is sales. You’re trying to sell your expertise and capital for startup equity. So, the more founders you reach out to and help, the more access you have. This is probably where you will spend the most time as an early angel, and how your access scales with time spent.

4. Send startups to investors who you want dealflow from

I didn’t want to just call this “networking” because just meeting investors is usually not enough. Every investor knows many other investors and can’t share with everyone. So, it’s natural that investors prioritize sharing with people who share good startups with them. This is not a trivial amount of work because it involves getting founder permission, figuring out who would likely be a good fit, and sending intros to relevant investors. I keep a spreadsheet of investors I’ve connected with and keep track of who sends me startups I’m likely to invest in. I want to keep getting more, so I actively try to share relevant startups with the ones at the top of the list. Most importantly, make sure you get permission from the founder before sharing anything.

5. Find a group of investors to invest with

Investing is a team sport. There are so many benefits to working with other investors: increased access, getting different perspectives, celebrating wins. I’ve found that the partnerships that have been the most fruitful have been the ones with people who spend the most time on investing, since angel investing takes time.

Side note: I’d highly highly recommend anyone interested in getting into angel investing apply for First Round Angel Track. It’s a great program where you get to learn from legendary investors and build a lasting network with other angels. I can’t believe it’s free and feel very lucky to have been a part of it. Pro tip: Over a thousand people apply to each cohort. How do you stand out? Show that you put in the time to find and invest in startups. Even better? Send them startups that they are likely to invest in.

Note: I didn’t mention brand in this access section because it usually takes a long time and a large effort before you get significant access directly from brand.


Capital


How much do I need to get started?

One misconception about angel investing is that you need millions to angel invest. This isn’t true; it’s common to start out relatively small (~5K check size). The most common angel check size is probably between 25 - 50K, but there can be a long tail of smaller checks. Unless there is a minimum check size that some startups set, usually the smaller the check size, the easier it is to get in oversubscribed rounds. Founders with oversubscribed rounds look for investors who can provide significant value for their check size, so if you put in a small check and provide a lot of value for them, that’s a win for the founder. If the capital isn’t coming directly from you, it’s important to be upfront about where your capital is coming from.


How can I get access to capital through scout programs?

Scout programs are programs that VC firms run to increase the number of deals on their radar. In a nutshell, firms provide the capitals, scouts find startups and write memos, firms approve, and the scout makes the investment with the firm’s capital. There are varying amounts of rewards to the scout that range from a per-deal flat fee to shared carry between the entire pool of scouts. This is a great way for new angels to access more capital. Most VC firms have them but they aren’t publicized so the best way to get into one is to reach out to people at major firms and ask if they have a scout program.


When should I expect returns?

You should understand the J-curve of venture capital returns. Note that it only applies to the success case, which is not common. In a non-success case, pretty much all of the capital is lost, so be prepared for that. In general, it’s safe to assume that any capital invested is gone and you should not make life decisions based on the assumption of a return. Even in a success case where you get a J-curve, you won’t break even until many (7+) years out. This is because the big winners take a long time to build.


Closing

Closing is important because in the Bay Area, founders have a wide access to capital. If there’s a startup you want to invest in, chances are, others do too. Here are some effective ways I’ve seen investors get into rounds.


3 tips on closing deals

1. References

References are typically the best way to sell founders, because founders want results. Good investors are usually great at selling themselves, and founders want more signal on who actually provides value. Typically, the best people to give references are either founders that the new founder may respect, or mutual connections. I’ve also found this to be one of the most effective ways to close, much better than trying to explain in depth how I can help. Because references are your strongest closing tool, actually being helpful to founders is the most important aspect of angel investing as I mentioned earlier.


2. Speed & Timing

Timing will affect your close rates significantly. If there is nobody else committed to investing and you’re the first commit, it will likely be an easier sell. However, if the round is oversubscribed and you just found out about the startup, it will be very hard to participate in the round. That’s why in general you should try to meet founders at soon as possible and commit as soon as possible (while still doing your due diligence). In general, I aim to make a decision or have concrete follow up questions within 2 days of meeting. To be able to do this, you should already have a concrete investment strategy beforehand. Going into your meeting, you should already do prior due diligence and know what questions you need to ask in order to make it a yes, so you don’t have to ask many (if any) follow ups after.


3. Be helpful before investing

Proactively provide relevant ways you can help, and actually follow through with them before investing. This requires a bit of creativity and varies from founder to founder. “Let me know how I can be helpful” is usually not enough. What kind of help does this specific founder need? In a space where many investors promise a lot of help, having a track record with the founder sets you apart.


After the check

A common notion is that angel investors don’t have to do much work after they put in the check. I suspect that this will become less and less the norm as capital becomes more abundant. While it’s true that the average angel investor doesn’t add much value, I still believe it is super important to support founders post-investment for a few reasons:

Startups are hard: If you work with someone who’s going through something hard, or if you have a friend who’s having a tough time, generally the right thing to do is to help them out. Out of everyone you know, founders probably rank high on your list of “people doing something tough and could use my help”.

Pro rata: Pro rata in a nutshell is being able to invest in a future round. In the current angel landscape, getting pro rata is rare at the seed round. If you weren’t helpful since the last round, it can be hard to invest in future rounds, which are usually just as competitive. These days, you have to earn your pro-rata.

References: Down the road, references are your strongest selling tool. Also, it’s not uncommon for founders to get back channel references on investors. You don’t want to miss out on a future deal just because you didn’t bother to respond to any investor updates.


Conclusion

In the Bay Area we as investors have the privilege of working with so many great founders, which itself is one of the great rewards of angel investing. Don’t take it for granted and treat founders well so we can keep the ecosystem awesome. Best of luck with your investing!

Thanks Ali Altaf, Bess Chang, Brian Nichols, Catherine Lu, Fareed Mosavat, Felix Feng, and Vincent Tian for reviewing early versions of this post!

Jeff Chang