What to Know When Writing Your First Check as an Angel Investor

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 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 is to find potential startups. The simplest way is by joining a group, which leverages collective deal flow and connections to surface investment opportunities each month.
• Online platforms: Websites like Wefunder connect startups with potential investors, providing a curated list of startups and streamlining discovery.
• Incubators and accelerators: These institutions support startups with mentorship, resources, and sometimes initial funding. By partnering with or keeping tabs on them, 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 review.

• Product or service: Understand the startup’s product or service. Is it innovative? Does it solve a real-world problem? Is there market demand?
• Founding team: A startup’s success often hinges on its founders. Assess their experience, expertise, and passion. A dedicated, knowledgeable team can navigate challenges more effectively.
• Market size: Ensure the startup is targeting a sizable market. A larger market often means higher potential for growth and returns.

3. Due Diligence

Now that you’ve identified the investment and gone through the preliminary review, you’ve likely already met the founders. If you haven’t, now is the time. Once you’ve met them, you can get access to their data room, the online vault where their financial and legal documents are stored.

• 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 projections.
• Competitive landscape: Analyze the competition. Does the startup have a unique selling proposition 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 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 their technology is scalable, secure, and robust.
• Reference checks: Speak to the startup’s previous investors, employees, and customers. Their insights can be invaluable.

4. Negotiation

Once you’re convinced about the investment, it’s time to negotiate, or not. At this point, you need to know whether you’re a price setter or a price taker. Neither is wrong, 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 whether the deal economics make sense.

5. Funding

After successful negotiations, the final step is to fund the startup. This can be done through a bank transfer, check, or 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 appealing, 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.