The Kingmaking Power of Angel Investors
In recent weeks, I've spent more time formalizing the fundraising approach I've called the “Angel Army” strategy. I've written essays about it, I've talked about it in podcasts, and I've taught it in webinars.
As more people begin implementing the strategy, I’ve received helpful feedback that has helped me realize that I’ve skipped a step in promoting the strategy (side note: I love feedback. Share share share!).
In many cases, people who generally understand how to implement the Angel Army strategy pass on actually using it because they don’t grasp the magnitude of the value of angels. If I can’t get that point across, I’ve failed at delivering an important tool to founders. The impact angels can have on an early- stage company via fundraising and beyond is massive and thus deserves its own essay.
First, the history of angel investors
The term “Angel” actually isn't a technology or company investing term. It comes from Broadway. Angels were the wealthy people who funded theatrical productions that were otherwise insolvent, non-money making ventures. These were things that could only be supported by someone who came from heaven to help like an angel. This term has been extended to apply to individuals who will put their own capital at risk to invest in and support businesses, usually at the earliest stages.
When it comes to the business investing version outside of the performing arts, angel investors in the past carried a much more negative connotation. They were capital that you went after because you couldn't find capital elsewhere. A lot of times they were wealthy individuals and older executives. A common negative stereotype painted the picture of a dentist with money to spare who invested in businesses they didn’t understand. As such, the horror stories of small angel checks requiring fielding regular calls, creating extra reporting, and listening to personal complaints created a fairly negative picture of angel investors. This is represented in the common advice that experts used to give around not having too many people on your cap table. In my opinion, this advice was also needed in the era of old investing structures that would extend larger rights to angels than is common today.
Angel investing today
Angel Investing has evolved significantly over the last ten years and insanely over the last two.
There are a variety of reasons that angel investing has evolved. One main trigger has been an accelerating transfer of wealth to younger tech- savvy individuals. This trend started with exits 10+ years ago like Google, YouTube, Facebook, Instagram, and Twitter, continuing with more recent tech darlings like Airbnb, Uber, and Snap. More significantly and in just the last few years, the explosion of crypto wealth has been one of the most significant transfers of wealth that the world has ever seen.
Alongside the minting of technocrat millionaires, highly visible wins have been a siren’s song for angel investing. Everything from Jason Calacanis turning a $25k Uber investment into >$100MM to loads of individuals turning even smaller investments into crypto ICOs into many millions of dollars has normalized the practice of investing money into tech startups.
With this new generation of angels, many of the old negatives have dissolved. Angel investors are now native to the world of technology startups who understand both the risk of a $0 outcome as well as the work that these technology companies engage in. This new generation has helped eliminate the thorn in your side angel investor stereotype.
Not just a mindset shift
The evolution in types of people engaging in angel investments was no doubt huge, but that was not the only factor that pushed the market forward. In addition, new tools and technology over the last years have smoothed out the friction associated with taking on small checks and other angel investors. Things like the Simple Agreement for Future Equity (SAFE) to standardize early stage investing docs, platforms like Clerky that allow easy distribution and signing of legal investment documents, Carta for managing a cap table and obtaining signatures, DocSend for seamlessly sharing materials, and more recently tools like roll up vehicles (RUVs) that explicitly target the administrative hassle associated with collecting investments from small individuals, aka angels. All these have helped eliminate the negatives associated with Angel investing.
From eliminating stigmas to becoming a force multiplier
Beyond just evolving out of negatives, Angels have become a force of positivity within startups. Here are a few ways angel checks can be force multipliers for a business.
Network Superchargers
Hot startups are magnets for valuable eyeballs. The best venture capitalists in the world keep their eyes on companies that attract talent for a multitude of reasons. Of course they want to monitor opportunities to invest, but they also know the talent inside these companies have a greater likelihood of being successful founders (aka future investments) than others. While the talented folks at rocketship startups that haven’t had successful exits yet don't have the capital to invest a significant amount in new companies, they are writing $1-5k checks at an increasing rate.
A $5k check might not enhance your operating runway, but its impact on your network can be massive. Once you put an angel onto your cap table, their network becomes accessible to you.
Say you take on a $1,000 check from a product manager at Coinbase - almost immediately, you will have access to a cadre of VCs, different angel investors, and other talented folks within the Coinbase network.
Credibility Boost
Part of an investor’s job is determining how believable your pitch is. In all likelihood, the VCs you pitch won’t be deep experts in your space and will be looking for ways to underwrite your credibility. Putting an Angel onto your cap table who represents an industry or represents expertise, can be a beacon of credibility for you as an operator and the vision of your company. The fact that an executive who has led companies in the same industry as yours would put money behind you is a strong signal to the market that you are a worthwhile bet.
Mentioning one small angel in an intro email or during a live pitch can make a perception difference that affects investment decisions.
Backchannel Sources
In fundraising, the flow of information has a shockingly large impact on the process. It’s hard for VCs to take the implicitly biased words of a founder at face value. On the other side, founders benefit from updates on process but can unwittingly send negative signals when asking for updates.
This is why backchanneling exists. Backchanneling is when you send or acquire information through a third party. It is a valuable way to communicate without the implicit bias that a direct outreach delivers. The more angels you have on your cap table, the more backchannel options you have to influence investment through the flow of information.
Knowledge, Insights, Mentorship
So much of winning in startups is short- circuiting the learning process and making better decisions. Putting expert angels on your cap table gives you access to some of the most valuable informational assets in the world. When you have a direct line to people who have done what you want to do, made mistakes that you could fall into, and learned playbooks that deliver success, you have installed a built-in cheat code to success. Those expert insights are worth their weight in gold and are much more valuable than the dollars invested.
Smart Feedback
Startup gurus often talk about a failure to launch being the most common kiss of death for first- time founders. The reason is that launching gives you access to feedback and feedback is what drives product-market fit.
One way to build in great pre-launch feedback (NOT a substitute for actual market feedback btw) is by taking on angel investors. Angels can be great beta testers to begin the flow of feedback as you iterate on product. More angels mean easier access to feedback and a larger pool of testers to help you avoid relying on the incorrect assumptions you have in your head. It’s super valuable.
PR
“If you build it, they will come.” - Field of Dreams (1989)
“No. Just no.” - Jason Yeh (2022)
The sooner founders open their eyes to how false a sentiment like that is the better. Startups are in an attention game from the moment they step into the world. From investors, to customers, to employees, startups need to be able to drive attention.
In this world of ubiquitous social media, every person has become a mini media outlet. Angels with their own networks and influence are incredible PR machines or at least PR amplifiers. Start sharing your message with the world and bring on angels to help you enhance that message.
In startups, it takes a village. You might as well fill that village with fantastic angels who. can drive tons of value for your company. The best angels are more than just sources of additional capital— they help with access to previously out-of-reach networks, provide industry insights and market knowledge, amplify your company’s outreach, and so much more. The bottom line: angel investors can be an invaluable part of your fundraising efforts and executing a strategy to bring them onto your cap table is likely to be one of your best moves yet.