Make no mistake about it: There is an art to raising angel capital. Raising angel capital is not harder or easier than raising institutional venture capital—it’s simply different. Here’s how to do it.
Make sure they are “accredited” investors. “Accredited” is legalese for “rich enough to never get back a penny.” Just read what the SEC says. You can get into a boat load of trouble for selling stock to the proverbial “little old lady in Florida,” so don’t do it. And get a good corporate finance attorney (as opposed to your aunt the divorce lawyer) to advise you about the process of seeking investments.
Make sure they’re sophisticated investors. I’m a masochist for hate email, but I’ll tell you anyway: the least desirable angel investor is a rich doctor or dentist—unless you’re a life sciences entrepreneur. They will drive you crazy because they read how Ram Shriram made gazillions of dollars as an early investor in Google, and now, six months later, they want to know when you’re going public too. Sophisticated angel investors have knowledge and expertise in your industry—they will have “been there and done that.” Sure, you want their money, but you also want their expertise. Be warned: if you want to raise venture capital in later rounds, it’s going to be much harder if you show up with a long list of unsophisticated investors.
Don’t underestimate them. If I had a nickel for every time an entrepreneur told me that she was going to raise angel capital because it was easier than raising venture capital, I wouldn’t have to run ads in this blog. Do everything on the venture capitalist wishlist because the days of angel investors as “easy marks” are gone forever—if this was ever true. You can have an “early stage” company but not a “dumb ass” company, and angels care as much about liquidity as venture capitalists—maybe even more since they’re investing their personal, after-tax money. Angels do not consider investments to be “charitable contributions”—well, no angel whose money you’d want, anyway.
Understand their motivation. Here’s how angel investors differ from venture capitalists. Typically, angel investors have a triple bottom line. First, they’ve “made it,” so now they want to “pay back” society by helping the next generation of entrepreneurs. Second, they’d like to stay current with technology and tinker with interesting products and technologies. Finally, they want to make money. Thus, they are often willing to invest in less proven, more risky deals to provide entrepreneurs with the ability to get to the next stage. I know many nice venture capitalists, but I cannot tell you that many of them are motivated by the desire to pay back society or seek intellectual stimulation. 🙂
Enable them to live vicariously. More on angel motivation: one of the rewards of angel investing is the ability to live vicariously through an entrepreneur’s efforts. That is, angels want to relive the thrills of entrepreneurship while avoiding the firing line. Thus, you should frequently seek their guidance because they enjoy helping you. By contrast, most venture capitalists only want to get involved when things are going really well or really poorly.
Make your story comprehensible to a spouse. The investment committee for many venture capitalists works like this: “You vote for my deal, and I’ll vote for yours.” That’s not how decisions are made by angel investors because the usual membership of an angel’s investment committee consists of one person: a spouse. So, if you’ve got a “client-server open source OPML carrier class enterprise software” product, you must make it comprehensible to the angel’s husband when he asks, “What are we going to invest $100,000 into?”
Sign up people that they’ve heard of. Angel investors are also motivated by the social aspect of investing with buddies in startups run by bright, young people who are changing the world. Even if the other investors are not buddies, investing side by side with well-known angels is quite attractive. If you get one of these guys or gals, you’re likely to attract a whole flock of angels too.
Be nice. More so than venture capitalists, angel investors fall in love with entrepreneurs. Often, the entrepreneurs remind them of their sons or daughters—or fill the position of the sons or daughters they never had. Venture capitalists will often invest in a schmuck if the schmuck is a proven money maker. If you’re seeking angel capital, you’re probably not proven, so you can’t get away with actling like a schmuck. Therefore, be nice until you’re proven—although I hope that when you’re proven, you’ll also realize that you should be a mensch.