In order to grow into a successful angel investor (‘angel’) one needs sufficient opportunities to review.
It’s hard to catch a fish if the pond is empty and from experience, we know that it takes around 100 deal reviews before one good investment can be made. At the same time, angels should focus on constructing a portfolio of (multiple) investments.
This article is meant to help angels build a routine in order to make sure they get to see the great opportunities out there. These guidelines for deal origination (or deal sourcing) can be used by both novice and experienced angels.
Sourcing channels
There’s typically a range of different channels available within each geography (country or city). Investors seeking to get global exposure can also find suitable channels.
Some channels require more investing expertise than others. Most channels revolve around network, network, network. The one exception to this is the ‘Syndicates’; they allow angels to follow a relatively passive investing strategy as Syndicates are generally positioned closer to investing in a VC fund as LP.
Here’s a (not exclusive) list of options that an angel has at his or her disposal:
- Formal Angel groups
- Informal Angel groups
- Network of venture capitalists
- Network of professional service providers
- Venture Builders or Accelerators
- Outbound strategies
- ‘Offline & Online’ events
- Syndicates
Also Read: All you need to know about how angel investors evaluate their opportunities
Formal Angel groups
Angel groups can be broken down into local and international networks. What they have in common is that both are typically professionally organised and managed (some better than others).
Local groups
Almost every major city in the world has a few local groups. They are great for novice angels as these networks have the resources to get you started and help you to invest close to home.
Local groups typically provide:
- Education on angel investing
- A community of like-minded (novice and expert) investors
- The deal flow of local companies or demo days
- Offline & online get-togethers with other members
- A specific focus or mission
In Singapore we have for example:
International groups
International groups typically require you to have more experience as an investor and most of the times they don’t have the resources to ‘get you started’.
Also Read: Why Southeast Asia is great for your angel investments
They are however a great way to source deals internationally and geographically diversify your portfolio.
Some international groups:
Most networks charge an annual membership fee. Almost all angel groups recommend you to have an active involvement in order for you to generate success. You are still the one making the investment decisions.
Do your research before signing up as a member as not every group will give you great value for money.
Also Read: What should you consider before becoming an angel investor?
Informal Angel groups
You can also build your own group of angels. We see this typically happens where angels have a common background or interest. It’s recommended though to make sure at least several ‘members’ have experience with angel investing so there’s some sort of quality control within the group.
Also, you will need some rules on who will source deals and evaluate them. If the group is ‘too’ informal, chances are you might have a good time, but not get to invest in any (good) deals.
Keep in mind: angel investing is a risky game and you want to make sure to understand the basics before you get started.
Some research suggests investments made in ventures found outside of an investor’s trusted business network (e.g. identified through a friend and family network) may well be less successful and could have a higher possibility of failure (Wiltbank, 2005).
Network of venture capitalists
The more experienced angels could choose to work closely together with venture capitalists (VCs). VCs prefer to work with angels as they are a source of potential deals for them.
VCs get to see a lot of deals that are either too early or simply do not fit their investment thesis. They might like the founders and introduce you to them. Or sometimes there’s a little room in the funding round left for angels to co-invest and having a good relationship with the VC can lead to an invitation to participate.
Also Read: Why angel investor Eddie Ler thinks startup investment is like The Lord of the Rings
Having close relationships with VCs that have a track record will help you to open quality another channel but it is not very suitable for novice angels as you’ll need to carefully curate the VC that you want to work with.
The network of professional service providers
It’s wise to build a (trusted) network of bankers, consultants, accountants, and lawyers. Through these relations, you can get deals and you will have the benefit that a professional already had a look at the company and somewhat was able to vet the quality.
The benefits are smaller compared to building a network of VC (with track record), but the relations with professional service providers are ‘easier’ to build.
You can indicate on your Linkedin profile that you are active as an angel investor. This will lead to founders reaching out to you with their pitch decks. The quality of deals might not always be too good (or at least nobody might have vetted them at all yet), so be careful!
I also recommend you to indicate any previous investments you’ve made as an angel on your profile, this will ensure that you (as an investor) look (more) credible. Keep in mind: good founders will always look for ‘smart’ finance and due diligence should work both ways.
Personally I always maintain our portfolio on my profile so any potential stakeholder can understand us better. We don’t shy away from listing both the winners and write-offs. In addition to LinkedIn, we use Crunchbase to promote our organisation and we typically tell our portfolio companies to do the same.
Using Linkedin is suitable for both novice and experienced angels.
Also Read: 6 Asian celebrity angel investors you may not have heard about
Venture Builders or Accelerators
Venture builders and accelerators work with the startup founders before the venture is launched and they are typically very suitable for founders that are still in the ‘idea stage’, a stage that’s typically too early for angels to invest in.
It is recommended for angels to network with these venture builders and accelerators. Most of them organise ‘demo days’ where founders get to pitch their venture to a group of investors.
Some examples:
Outbound strategies
If you know what you are looking for you can reach out to companies to see if they are (or soon will be) raising capital. Perhaps because you read about them in the media or a relation told you about them.
Important:
- Ability to explain how you can add value to the company (you’ll need to pitch first)
- Clear on the geography that you are sourcing in
- Clear on the industries that you are looking at
Tip: instead of reaching out directly to the founders, it would be even better to ask for an introduction through an existing investor.
Above strategy can be very effective for experienced angels that have sufficient time (or resources) at hand and know exactly what they are looking for.
We have several companies in our portfolio that we found through such outbound strategies. I see these companies typically perform better (vs. the ones that are struggling to raise money) as I’m of the opinion that an investor should have to fight to get on the cap table of a company. After all, quality founders might not need your help.
‘Offline’ and Online’ events
Be out there. Attend events. Sign up as a speaker. Network with people and share what you are looking for, indicate that you are looking to invest, and explain what value you can add to a company.
Syndicates
Syndicates allow you to follow a ‘lead’ investor who already invested in a deal. The lead is typically an experienced investor and he basically shares the deal with his network to co-invest. In return, the lead typically receives a carry when there’s a profitable exit. Sometimes a small management fee is charged by the lead to the Syndicate investors to cover for the legal costs.
The advantage of Syndicates is that they allow you to invest ‘smaller’ tickets while they take care of the deal sourcing, due diligence, and legal matters. And hence they are a great way to explore angel investing without taking an enormous risk.
Syndicates are one of the few strategies in angel investing that allow you to be more or less passive and rely on the ‘syndicate lead’ to handle the investment. The advantage of Syndicates is that they allow you to invest ‘smaller’ tickets while taking care of the deal sourcing, due diligence and legal matters.
The downside is that there are limited syndicates available in Southeast Asia as the majority are active in the United States. Also, I still recommend you to do your own research and not blindly follow the syndicate lead.
An angel has multiple channels that he/she can use and we recommend applying a combination of strategies to explore what works best for you. Everything depends on how much time and resources you have available.
The above guide is not exclusive and is solely meant to give several options that have worked well for us.
Angel investing is hard work and generating good results requires your time, passionate learning, and energy.
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