Angel Investment Book Guide for Early-Stage Investors

As an early-stage investor, you're likely aware that angel investment can be a lucrative way to support innovative startups and potentially earn high returns.

Angel investment typically involves investing in startups that are still in their early stages, often in exchange for equity.

This type of investment can be a great way to diversify your portfolio and potentially earn significant returns.

However, it's essential to approach angel investment with caution and do your due diligence to minimize risk.

A good place to start is by understanding the different types of angel investment, including seed funding, series A funding, and bridge funding.

Discover more: Small Business Venture Funding

Writing a deal memo is a crucial step in the investment process. It helps you clarify your thoughts and decisions, and serves as a valuable reference point for future investments.

Always write a deal memo when you invest, outlining the reasons behind your investment, potential risks, and the conditions necessary for the startup to generate returns. This memo will become a key document in your investment portfolio.

By regularly reviewing and learning from your deal memos and notes on rejected startups, you'll refine your investment strategy and make more informed decisions over time.

Take a look at this: Investment Decisions

To get started on a cap table, you'll need to identify the different stakeholders involved in your company. This includes the founder, employee, advisor, angel, and VC.

The founder is the first entry on the cap table, representing the initial investment and ownership.

An advisor brings value to the table by trading their skill, time, connections, and reputation.

Employees are also included on the cap table, reflecting their ownership and potential future investments.

Angels and VCs are later entries on the cap table, representing their investments and ownership in the company.

Here's a breakdown of the common stakeholders found on a cap table:

Rounds are a crucial part of the investment process, and understanding them can help you navigate the journey of securing funding for your business.

Sweat equity, also known as founders' equity for starting, is the initial investment you put into your business, often in the form of your own time and effort.

Suggestion: Angel Investors for Small Business

Bootstrapping is when customer money pays for expansion, allowing your business to grow without relying on external funding.

Friends and Family funding is the first money you raise from relatives, often used to get your business off the ground.

Accelerator/Incubator funding is a structured program that includes an investment, providing valuable resources and guidance to help your business grow.

Seed/Angel funding is the focus of this book, providing the necessary capital to take your business to the next level.

A Bridge round is a funding round that typically involves the same investors as the seed round, bridging the gap to the next round of funding.

Series A funding is led by Venture Capitalists, and it's essential to take your pro-rata share of the investment to maintain control of your business.

At some point, you'll start considering selling some of your stake in your business through "secondary" sales, which is typically the case in Series B and beyond.

A different take: What Is Seed Investment

Writing deal memos is a crucial step in the investment process. It's a simple yet powerful tool that can help you make more informed decisions and avoid costly mistakes.

According to Angel, every investor should write deal memos before making any investment. This means taking the time to think critically about why you're investing in a particular startup and what you think the risks are.

A deal memo should include why you're investing, what you think the risks are, and what you think has to go right for the startup to return money on the investment. This helps you stay focused on the key factors that will determine the success of your investment.

It's also a good idea to write clear notes on the reasons why you passed on a particular startup. This can help you learn from your mistakes and avoid similar pitfalls in the future.

Here are some key points to include in your deal memo:

By taking the time to write deal memos, you can make more informed investment decisions and increase your chances of success.

As an investor, you want to know which startups have what it takes to succeed. Paul Getty, an expert in the field, suggests focusing on the winners, big markets, and clear ideas. This means looking for startups with a strong track record of growth and a solid understanding of their target market.

To evaluate a startup's potential, Getty recommends considering the following factors: full-time employees, revenue, funding history, customer acquisition methods, and the founder's motivation. By analyzing these aspects, you can gauge the startup's burn rate and financial stability.

There are two types of businesses in Getty's world: those that are insanely scalable and everything else. If you were to invest in a startup, you'd want to know if the founder has a clear plan for growth and if the business has a strong competitive advantage.

To get to the heart of a startup's potential, Getty asks tough questions, such as: "Tell me about your competition", "How do you make money?", "How much do you charge customers?", "How much does your average customer spend?", and "Tell me the top 3 reasons why this business might fail?". By digging deep, you can separate the winners from the losers and make informed investment decisions.

Here are the key questions to ask a startup founder:

Angel investors typically invest in startups that are still in their early stages, often with a valuation of less than $1 million. This is because angel investors are looking for high growth potential and are willing to take on more risk.

Angel investors usually invest their own money, and it's not uncommon for them to invest in multiple startups at once. In fact, one study found that the average angel investor invests in around 4-6 startups per year.

Understanding the risks and rewards of angel investing is crucial for success.

As an investor, understanding the founder's motivations and vision is crucial. The Four Founder Questions can help you get to the heart of what drives the founder.

Why has this founder chosen this business? This question gets to the root of the founder's passion and purpose. It's not just about making money, but about creating something meaningful.

To answer this question, you need to dig deeper and understand the founder's "Why". What's driving them to take the risk of starting a business? Is it a desire to solve a problem, or to create something new and innovative?

Curious to learn more? Check out: Invest Why Refi

How committed is this founder? This question assesses the founder's dedication and perseverance. A committed founder is more likely to overcome obstacles and stay the course.

A committed founder is willing to put in the hard work and make sacrifices to achieve their vision. They're not just in it for the short-term gain, but for the long-term success of the business.

What are this founder's chances of succeeding in this business — and in life? This question evaluates the founder's potential for success. It's not just about their skills and experience, but also about their ability to learn and adapt.

To answer this question, you need to assess the founder's strengths and weaknesses, as well as their ability to navigate challenges and setbacks.

What does winning look like in terms of revenue and return? This question defines what success means to the founder. It's not just about hitting a specific revenue target, but about achieving a certain level of profitability and growth.

Here are the Four Founder Questions in a concise format:

When investing in startups, it's essential to focus on the founders rather than the product. This is a key takeaway from equity crowdfunding investors, who believe that investing in founders and teams is more crucial than investing in products.

Investors should look for founders who are "doers" rather than "talkers." This means identifying individuals who have a track record of taking action and iterating on their ideas, rather than just talking about them.

Founders who are "doers" are more likely to succeed because they're willing to take risks and learn from their mistakes. They're not waiting for the perfect time or a safety net before taking action.

Here are some key characteristics of "doer" founders:

By investing in founders who embody these characteristics, you'll be more likely to find success in your equity crowdfunding investments.

If a startup isn't sending you monthly investor updates, it's going out of business. Angels want to feel needed, and founders who don't make their angels feel needed have lost their most likely source of follow-on funding — their current investors.

Lucky people surround themselves with the most successful people in the world and take chances. It takes work, not luck, to achieve success.

Communicating regularly with investors is crucial for a startup's survival. Founders should prioritize keeping their investors informed about the company's progress.

For more insights, see: How to Get Venture Capital Funding for Your Startup

Cognitive biases like confirmation bias and negativity bias can significantly influence our investment decisions. These biases can be blind spots that affect our judgment.

Documenting our reasons for investing and potential risks helps clarify our thinking and provides an unbiased account of our logic. This process can be especially helpful when making large investments.

Investors should regularly review their investment decisions and reflect on their past memos to improve their decision-making process.