The Role of Angel Investors

TLDR;

Angel investors get involved early in a company’s lifecycle. Angels provide the groundswell leading to the 1) capital and 2) support needed to increase a startup’s chance of success.

Quick Note: In this post I speak to angels who invest directly on the cap table. While angels can certainly be successful investing passively via SPV, it’s less likely she/he will have a direct line to the founders. SPV angels can play an important but different and less direct role.

More than ever, angel investors play a crucial role in supporting the startup ecosystem.

Traditionally angel investing was a bit of an ‘old boys’ club. Angels were largely high net-worth men residing in the Bay Area, or NYC. Thankfully that has started to shift with a much greater diversity of investors participating. Angels now come in all shapes and sizes and act as gatekeepers, the first supporters a founder turns to when they decide to raise capital. As such angels continue to accrue prominence with most VC firms actively building relationships with angels and offering scout, or co-investment programs.

Capital (and hope) is the lifeblood of venture backed startups. Drawing on a poker analogy, startups are bundles of risk. Each new round of financing enables founders - and investors- to flip over more cards. Angels are a secret weapon helping increase the odds of better cards.

Angels have three primary roles:

is simply being willing to take a chance on someone early. The earliest angels invest in deals that lack signal. The founder may merely have an idea, with little, or no traction. Most angels investing belief capital already have a relationship with the founder, or see something that makes them believe. They are investing in “lines, not dots”.

(H/T Julian Weisser) is when angels help catalyze in-progress rounds through investment, co-sign and introductions. The modern seed round often looks something like the diagram below: angels commit investments ranging from $5k - $50k while simultaneously helping to introduce founders to venture investors, SPVs and other angels.

*Diagram inspired by this article

refers to the unique role angels are able to play: they straddle the line between friend and fiduciary. Because they are some of the earliest believers, they tend to be perceived by founders as friendly relative to more institutional capital. While angels have skin-in-the-game, it’s typically small enough to avoid issues of agency helping make them easier confidants for founders. Also as many angels themselves are operators and founders their ‘real-time’ domain knowledge/experience makes them uniquely able to provide support.

I also want to highlight the difference between “first call” and “last call” angels, a concept I first heard from Anne Dwane. First call angels are folks founders turn to for initial validation. They are the earliest supporters (often the first yes). These angels understand that by being so early they are able to build their reputations, help form the cap table, get preferred economics and allocations. Last call angels tend to commit at the tail-end of rounds, helping de-risk their investments. The downside for last call angels is that rounds are often more difficult to win allocation for (you must prove your worth), you have less ability to build your reputation and sometimes you receive less favorable economics.

I’ve drawn a sketch to highlight this below:

Finally, I’ll point out that most angels’ involvement tends to be cyclical, corresponding to each new fundraise cycle.

If you’re a founder, what role do you need your angels to play?

If your goal is fundraising, you want to seek out angels who provide you with added legibility to other investors. These are angels who VCs and downstream capital respect; people who whom introductions are taken seriously. Alternatively, you might really want investors who with specific domain expertise, people who will roll up their sleeves and help. Or perhaps you want angels who work at companies that could be become customers. Ideally, have a mix of all the above. Also remember not to mistake ‘legibility’ for celebrity. I love the expression “real G’s move in silence”. Many of the best angels and investors are not super public on places like Twitter.

Want maximum value from your investors? Here’s a post on putting your investors to work.