Everything You Need to Know About Angel Investors


Connecting with the right kind of Angel can be the answer to an entrepreneur’s prayers
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Entrepreneurs, you know about Angels of course — but do you really know one when you see one?

Venture capital is synonymous with startup funding, at least that’s what conventional wisdom and folklore tell us. The reality is that Venture capital firms invest primarily in established ventures with significant traction and revenues — and rarely invest in the mythical ‘2 entrepreneurs in a garage with a breakthrough idea’. For startups, VC funding is as rare as winning the lottery.

For first-in startup investment money, it’s “calling all Angels”.

After entrepreneurs start their company by bootstrapping with their own personal funds (if any), and tap into friends & family (if they happen to have any with that kind of cash) — entrepreneurs then are hoping, seeking — and praying – that an Angel will appear to make that critical first investment.

Angels are no longer just “rich people who write checks.” Over the last 30 years, Angel Investing evolved from individual “patronage” to a diverse and complex ecosystem of investors, with a hierarchy. taxonomy, behaviors, and archetypes.

Entrepreneurs need to understand the different types of Angels so they don’t waste valuable time chasing the wrong Angels.

Approaching the wrong Angel is like going to the wrong kind of dealership to get your car repaired: You will waste time and money, and your car won’t work any better, and won’t travel any faster or further.

First — Let’s define “Angel Investor”

An Angel Investor is usually a businessperson, entrepreneur, or executive who accumulated sufficient resources over their career. They are deemed “accredited” by the SEC — which means they have enough investing savvy and net worth where they can now allocate part of their wealth to investing in new companies. Generally, this is between 5% to 10% of their assets.

Angel Investors also differ from “Friends and Family” investors — in that most Angels don’t have a prior personal relationship with the founders. Thus, the founders and the Angels are bound by a few extra SEC regulations and have more formal agreements with the company.

The US Small Business Administration, estimates are that about 300,000 people have made an angel investment in the last two years and that they provided funding for about 30,000 companies per year. More recent data from the Angel Capital Association (ACA) estimates the potential number of angel investors at 4 million.

Some quick Angel Investor stats (from ACA “American Angel Report”)

  • The average investment per Angel is about $38,000 per round
  • Each has 10–12 companies in their portfolio
  • 32% are 51–60 years old
  • 44% are older than 61 years old
  • 16% are 41–50 years old

The Angel Archetypes

Already, you can see that all Angels aren’t created equally. 21st century entrepreneurs need to know the differences so they can spend time pitching to the right Angels and not waste time on Angels that will never be an investor.

Here’s a partial taxonomy of the major types of Angels — who they are, and the upsides and downsides of working with them:

One-Shot Angels

Who they are:
These are people who have made one single Angel investment in a promising entrepreneur’s company, almost as if they were a friend or family. More than likely they are a colleague or an executive in the same industry, who recognizes that the startup has a valuable solution to a problem in that industry.

Upsides:
This kind of Angel “gets it” — maybe even more than the entrepreneur. And they have the ability to help the entrepreneur attract customers and other investors.

Downsides:
They can be too hands-on, and possibly too meddlesome in the company. And they probably only will make that one single startup investment in their career. So, if you identify one of these angels — it might be unlikely that they will make an investment in another startup.

SuperAngels

Who they are:
These are Angel Investors who have made so many successful investments, that it has become their main profession. Think Ron Conway, Chris Dixon, Paul Graham, or Jason Calacanis. Most probably were early investors in companies like Facebook, Google, Uber, and Airbnb.

Upsides:
They know the startup ecosystem. They can see diamonds in the rough sooner than others, and they are quick to write checks. They invest often in the “right entrepreneur” (despite a bad idea), as they do in promising companies. And most seem to be easy to reach or approach.

Downsides:
Lots of entrepreneurs are wanting to pitch them — so there’s a lot of noise. Many SuperAngels have mini-organizations set up to vet (or accelerate) the deal flow. This means the entrepreneur is in competition with so many others after SuperAngel money and may have to deal with a few intermediaries.

SuperStar Angels

Who they are:
Celebrities turned Angels (or Angels turned celebrity). Yes, these are the ones you constantly hear about in the news and TV. They’ve invested large and loud in many companies — some interesting, some hugely successful. Think Ashton Kutcher, Katy Perry, Jay-Z or Ryan Reynolds.

Upsides:
They are indeed active investors and make frequent investments. No matter how small the investment — having them as an investor has many other positive effects — attracting customers, industry buzz, and attracting other investors.

Downsides:
There’s a long line of people trying to get on their radar. And they already have a full-time career. You need to be very persistent, lucky, or clever. Generally, they are looking for companies with solid operating metrics, as opposed to high growth potential. ie — they are not going to take the time to understand your AI-powered blockchain crypto product. These days, the more active celebrity investors are forming their own venture capital firms (or partnering with one) — and no longer fit the definition of an angel investor.

Mafia Angels

Who they are:
Highly successful, very tech-savvy former founders or early employees of successful startups: Think Microsoft, Google, Facebook, Amazon, Paypal — where the first few dozen employees become multi-millionaires. For instance the “Paypal Mafia” includes Peter Theil, Elon Musk, Reid Hoffman and Dave McClure — and many other notable Silicon Valley tech executives.

Upsides:
They share similar characteristics to Super Angels. And Mafia Angels are notable for their affinity for and willingness to help promising entrepreneurs. They can write checks quickly and personally, and make things happen fast by leveraging their tight network of movers-and-shakers in the tech industry.

Downsides:
They are often quite busy — and may also be in the process of building their own next venture. Often these Angels will be investors in smaller venture capital firms, or accelerators. or hiding inside venture capital firms as partners and as Entrepreneur-in-Residence. These Angels tend to operate near the major entrepreneurial ecosystems such as Silicon Valley, NY, Boston, and Seattle — so if you don’t operate in these circles, it can be hard to engage with them.

Ultra-Wealthy Angels

Who they are:
These are individuals with a net worth in the $ Billions, often with family money or inherited money. These are not former executives or successful founders. You’d probably have to do a little researching to even know their names. They usually have little interest in the startup world — and instead are trying to leverage their wealth to solve some big social issues in the world.

Upsides:
If you can get introduced and connected to one of the Ultra-Wealthy (or their advisors) and get them interested, then the money is no object. Particularly if the subject of your venture overlaps or addresses one of their personal interests. Also — the Ultra-Wealthy tend to have “family offices” manage their money and investments. While not widely publicized, there are hundreds or thousands of these family office organizations that manage investments for the Ultra-Wealthy. They are run by professional money managers, and they have specific criteria and interests.

Downsides:
The Ultra Wealthy and their organizations are not startup savvy. Nor do they typically make startup investments. There are notable, very very notable. exceptions — but for the typical entrepreneur, it’s not a good use of time or energy.

Wealthy / Successful Executives

Who they are:
They have a net worth of millions, tens of millions, or even more — often because they had a long and successful corporate career, have retired, and cashed out. But they are more than just rich. They are usually a well-known leader and expert in one or two industries.

While not necessarily savvy about startup investments, they learn quickly.

Upsides:
They lend a high level of credibility and social proof to the startup. They may be excellent “partners” and help the company with connections and customers in the industry. They are not hard to find (since they are/were prominent in their industry) nor too hard to contact.

Downsides:
They may insist on a level of due diligence much more rigorous than other kinds of Angels — because they are not yet comfortable with the risk levels typically associated with startups.

Very often, these Angels will join Angel groups.

Angel Groups and Members

Starting in the ’80s and ‘90s Angels began to coalesce into formal and informal groups, with the goal of sharing deal flow and due diligence work, and pooling their funds to make larger investments. It also reduces their risk. Every major metro area has an Angel group (or groups). Angel groups are generally local organizations made up of 10 to 150 accredited investors interested in early-stage investing.

Angel organizations come in many forms, but all have certain characteristics:

  • They meet regularly to review business proposals
  • Selected entrepreneurs make presentations to the membership of the group
  • Member angels decide whether to invest in the presenting business
  • Angels work together to conduct due diligence to validate the plans, statements, and history of the entrepreneurial team

The Angel Capital Association (ACA) has more than 14,000 members inside 400 angel groups. The size of angel group investments in entrepreneurial firms varies widely. The average ACA member angel group had 42 member angels and invested a total of $2.42 million in 9.8 deals per year.

Upside:
Angel Groups are everywhere. They are highly approachable and are usually very specific on the criteria they are looking for (stage of the company, investment level, etc). They have specific steps and are active and savvy investors.

Downside:
The more investors there are, and the more money there is— the more risk-averse they are. This is not surprising, but don’t expect too many “leaps of faith” when dealing with a larger group of investors. The vetting process for some Angel groups can be formal and even rough. Angel groups are pretty regionally focused. And they can only practically vet or consider a small handful of startups every month.

Approaching Angels

For early-stage startups, there is far more Angel investment available than any other kind of investment money. But not all money is created equal. Entrepreneurs need to approach the right Angels for their particular stage, domain, market, and growth prospects.

Go to the wrong kind of Angel and you’ll spin your wheels, waste time and hit a brick wall, and potentially ruin your startup. But connecting with the right kind of Angel can be the answer to an entrepreneur’s prayers.


CJ Cornell is a serial entrepreneur, investor, advisor, mentor, author, speaker, and educator. As an entrepreneur, CJ Cornell was a founder of more than a dozen successful startup ventures that collectively attracted over $250 million in private funding; created nearly a thousand new jobs; and launched dozens of innovative consumer, media, and communications products — that have exceeded $3 billion in revenues.

He is the author of the bestsellingThe Age of Metapreneurship — A Journey into the Future of Entrepreneurship.”


And the upcoming “The Startup Brain Trust — A Guidebook for Startups, Entrepreneurs, and the Mentors that Help them Become Great.”

Follow him @cjcornell or visit: www.cjcornell.com

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