How to angel invest, part 7: your filter, day-to-day, and syndicates
You’ll get more out of this series if you’ve read part 1 (high-level angel investing guidelines), part 2 (debt, equity, and key terms), part 3 (company stages), part 4 (deal flow), part 5 (good founder qualities and red flags), and part 6 (market and due diligence).
Defining your filter
As you see more opportunities and start investing, you’ll develop a personal filter to help you hone in on the things you like best.
As an example, here’s a draft of the filter we outlined as we were designing Spearhead, a program that teaches founders how to angel invest and gives them funds to do so:
- Large market opportunity ($500m+ exit is foreseeable in ~5 years)
- Pre-money valuation or cap is $10m or less
- No uncapped notes
- You’re getting preferred shares
- Technology only. Any company where a significant portion of invested capital goes towards anything other than building and selling hardware or software is not a technology company. Specific categories to avoid: life sciences, medical devices and biotechnologies, pure e-commerce, capital intensive businesses, pure gaming businesses, lifestyle businesses, editorial content/media, consumer packaged goods, businesses with significant platform vulnerability (e.g., virally marketed apps on Facebook or Twitter), heavily offline businesses, or social impact or B Corps.
As an example, some of the companies that made it past my personal filter and are now in my angel portfolio include SVRF, Hashgraph Team, Blockdaemon, Ellen Chisa and Paul Biggar’s stealth startup, RightMessage, and a few others that aren’t public yet.
Your involvement as an angel
It can be tempting, especially if you have operational experience, to get very invested in the companies that you back as an angel. That’s not just with money, but with your time, emotions, and expertise. Although your advice will be valuable at key strategic points in the companies’ lifecycles, resist the urge to get too close. You’re there to provide capital and advice, plus help with whatever reasonable requests come your way (often they’ll be around introductions, hiring, and fundraising), but get out of the way when it comes to the day-to-day running of the company. If a company’s not working, the founders need to realize it and fix it fast. Your help may prolong the inevitable.
Remember, if you’re doing this right, you’ll eventually be an angel in dozens of companies. You can’t be intimately involved in all of them (nor do the founders want you to be). You should be an advocate, but a mostly passive one.
Your day-to-day should be spent mostly on whatever your primary job is, assuming that you’re not an angel full-time. Focus on your existing investments when they send you updates or ask for help. Evaluate new deal flow as it comes to you. Repeat.
Broadly, a “syndicate” is simply a group of investors who come in together to back a company in the same round. If two separate angels, plus VC firm A and VC firm B make up a company’s seed round, those four entities make up that round’s syndicate. If VC firm B puts in the most money, they usually set the round’s terms and are called the lead.
On AngelList, Syndicates has a more specific meaning. Here a single angel acts as a lead and can have up to 99 backers. The backers follow the lead on the AngelList platform, getting notified whenever the lead has a new investment to present. The lead does the work of finding the potential companies, vetting them, and deciding whether to invest. Then she writes up the terms of the round and the details that are exciting about the company, sometimes uploads the pitch deck, and send it out to the backers. The backers decide on a deal-by-deal basis whether they want to back the lead in the investment.
AngelList makes the process of running a syndicate much easier than it would be otherwise. Because everything happens online, the lead can communicate with his backers all at once. AngelList serves as the back office, removing all paperwork, speeding up the investment process, sending out funding wires, and managing distribution of any profits. As payment for these back-office services, AngelList takes 5% carry (I’ll explain carry in part 8).
Using AngelList to manage your angel portfolio can simplify your life. You can also see deals that you’d miss otherwise by following other investors’ syndicates. Although leading syndicates around the deals you find yourself is great, you can build a career as an angel by backing other leads, too.