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Finding angel investors. . .

September 2, 2008

Lots of people ask me, “How do I find angel investors?”  I don’t have a great answer, but perhaps I can help some of you think about who angels are and as a result perhaps you will be able to find them more easily.  To start, I think it is important to classify angels in a few classes:

  • Type 1: Novice angels with financial objectives
  • Type 2: Experienced angels with financial objectives
  • Type 3: Novice angels with subject matter expertise
  • Type 4: Experienced angels with subject matter expertise
  • Type 5: Family, friends and colleagues

You will find lots of Type 1 and 2 angels at angel investment groups.  The main problem with this group is that they have usually have a very limited understanding of your space and as a result require more information about your startup than you will be able to provide.  They want to be convinced that the IRR is going to be sufficient, but you aren’t even sure what the product or service will end up looking like.  Type 1 investors have NEVER made an angel investment and it is unlikely that they will invest in your deal unless they know a Type 2 investor who has already agreed to invest.  As a result, you might as well avoid Type 1 guys completely.  Type 2 guys are fine, but only if they have clear and provable access to professional investors.  Their relationship with professional investors (i.e. VCs) needs to be vetted prior to spending a tremendous amount of time with them (i.e. ask them for references to CEOs they funded and ultimately introduced to real VCs).  Talk to CEOs they funded and get an understanding of what it was like working with them.  Make sure there is value beyond the money.

Type 3 and 4 angels are the best, but they are hard to find (they almost NEVER join angel investment groups).  They are people who have previously made lots of money in and around your space.  They have subject matter expertise around your idea and can often provide a lot more than money.  In many cases they will know the ultimate customer that will ensure your success and insure their investment.  Novice angels in this space are almost as good as experienced angels, both groups will be able to understand your idea very quickly and will be able to evaluate your idea without lots of bogus financial models.  Start by talking to your lawyer, your friends, your colleagues, your competitors - anyone who might know people who had prior success in and around your space.  Check out LinkedIn and Facebook, use their advanced search functions.  Type 3 and 4 angels will be able to act on their own, investing without the ‘buy-in’ a Type 1 or 2 angel might need.

Type 5 angels are good and bad. They are your family, friends and colleagues.  They will invest in YOU, not necessarily your idea.  This is a good thing until and unless your idea fails and YOU fail them.  They won’t understand that angel investing is risky and they they are likely to lose 100% of the their money 90% of the time.  No matter whether or not you explain this prior to their investment, they won’t understand - EVER.  You may lose relationships with family members, friends and colleagues.

My advice? Focus on Type 3 and 4 angels.  Otherwise use your savings, borrow against your 401K, borrow against your home equity, get an SBA loan until your idea is ready for real investment dollars.

Written by Alexander Muse · Filed Under Blog, Startups, Venture Capital 

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