I get a lot of questions about how to get started in angel investing. In the past, I’ve
written about how to build a portfolio of angel investments to lower your risk,
methods to value a startup, and how due diligence can be your best friend.
I haven’t written about the actual process of making an angel investment, from
beginning to end. That’s a gross oversight on my part, as this is the blocking and
tackling of angel investing.
The process of investing is not as simple as writing a check or clicking buy through a
brokerage portal. It involves research, evaluation, and an understanding of a
company’s potential outcomes.
Here's a step-by-step guide on how to write your first check as an angel investor.
1. Discovering Potential Investments
Angel Networks: The first step in the angel investment journey is to find potential
startups. The simplest way to do this is by joining a group like the Render Capital
Angel Network. We leverage our deal flow as a part of Render Capital, along with
our connections, to provide investment opportunities to our members each month.
Online Platforms: Websites like WeFunder connect startups with potential investors.
These platforms provide a curated list of startups, making the discovery process
Incubators and Accelerators: These institutions support startups by providing
mentorship, resources, and sometimes initial funding. By partnering or keeping tabs
on these entities, you can get early access to promising startups.
2. Initial Review
Once you've identified a potential investment, it's time to conduct a preliminary
Product or Service: Understand the startup's product or service. Is it innovative?
Does it solve a real-world problem? Is there a market demand?
Founding Team: A startup's success often hinges on its founders. Assess their
experience, expertise, and passion. A dedicated and knowledgeable team can
navigate challenges more effectively.
Market Size: Ensure that the startup is targeting a sizable market. A larger market
often means a higher potential for growth and returns.
3. Due Diligence
Now that you’ve identified the investment and gone through the preliminary review,
it’s likely you have already met the founders. If you haven’t, now is the time.
Once you’ve met the founders, you can get access to their data room. This will be
the online vault where their financial and legal documents are stored. You’ll need to
review these documents.
Financial Health: Review the startup's financial statements. Look for red flags like
excessive debt or a short runway. Understand their revenue model and growth
Competitive Landscape: Analyze the competition. Does the startup have a unique
selling proposition (USP) that sets it apart?
Customer Feedback: If the product is already in the market, what are customers
saying? Positive reviews and testimonials can be a good sign.
Valuation: This is crucial. Determine the startup's valuation and see if it aligns with
industry standards and your investment goals.
Legal Review: Ensure that the startup has all necessary licenses and patents. Check
for potential legal disputes or challenges.
Technical Assessment: If it's a tech startup, a technical review is essential. Ensure
that their technology is scalable, secure, and robust.
Reference Checks: Speak to the startup's previous investors, employees, and
customers. Their insights can be invaluable.
Once you're convinced about the investment, it's time to negotiate...or not. At this
point, you need to know if you’re a price setter or a price taker. Neither is wrong, We
but it will affect your next step.
If you’re a price setter, you’re looking to write a large check and you’re willing to
lead the round. This means you’re likely negotiating the terms with the founders.
If you’re a price taker, you’re reviewing the terms offered by the startup and
deciding if the deal economics make sense.
After successful negotiations, the final step is to fund the startup. This can be done
through a bank transfer, check, or even online platforms. Ensure that all legal
documents are in place and that you receive confirmation of your equity stake.
6. Post-Investment Engagement
Your role as an angel investor doesn't end with funding. Stay engaged with the
startup. Offer mentorship, introduce them to industry contacts, and provide
feedback. Your experience can be invaluable to the startup's growth journey.
Angel investing in tech startups is both thrilling and challenging. While the potential
for high returns is nice, the risks are also enormous. By following a structured
approach, conducting thorough due diligence, and staying engaged post-
investment, you can increase your chances of success
Are you ready to write your first check? Get in touch.