Founders’ Guide: 7 Tips for Raising your Seed Round from Angel Investors
FundersClub reviews thousands of technology startups every year, and as a VC, has backed a global portfolio of top startup founders. Our insights come from our network of top startup founders and startup investors, and from our own experiences. Christopher Steiner was a co-founder at Aisle50, YC S2011, acquired by Groupon in early 2015.
Startups raising their first seed capital after family and friends money will usually draw from the “angel” class of investors, individuals who typically invest $20,000 to $100,000 per company. Exceptions exist, but more often than not, these angel investors don't form indelible marks on a startup. Success or failure will still ultimately be decided by the work of the founders themselves, but great angels can give startups invaluable assistance during the early building process, and terrible angels can make life very difficult for a young startup.
Value-add investors—investors that offer expertise, network, etc.—are preferable to investors that offer just checks. Angels can land in either of these camps. Within this comparison exists significant nuance. No two angel investors are the same—as Paul Graham of Y Combinator writes, "Investors vary greatly". Nor are any two startups the same. Each fundraise is unique based on the macroeconomy, the competitiveness of the round, the needs of the company and founder, and the investors at the table. Given the complexity of navigating a fundraise, we’ve distilled some 7 tips that are helpful for founders looking to raise their first round of capital.
1. It's usually best to avoid first-time angels
While it's true that all investors--whether it’s Chris Sacca or Peter Thiel--have to start somewhere, it's advisable to choose an experienced angel over one that is writing his or her first check. Startup founders may have to educate first-time angels on risks, etiquette and how standard financial instruments in the venture world—like convertible notes—actually work. That's not a founder's job, and taking on the unschooled can lead to misunderstandings that neither side saw coming—such as an angel seeking to call their note when a convertible note’s maturity date arrives. Experienced angels will know that the standard play is to extend the maturity date of the note. The upside of an angel investment revolves around future equity value in the company, not interest rates, and potentially bankrupting a struggling startup by calling a convertible note is usually unacceptable angel investor behavior.
2. Investors often ask for founders' references; founders should do similarly
Good due diligence processes almost always include founders' references. And just as founders have left a trail of data with those they've worked with, so too have angels. It is important for a founder considering taking investment to speak with founders in the angel investor’s past portfolio. Over coffee or a call with the reference founder, check that the angel hasn’t been exceedingly meddlesome, that the investor has been fair in their behavior, that they’ve added value to the company through advice, recruiting or meaningful introductions, and that at a minimum they have not caused harm. If an angel doesn't offer a list of references, simply reach out directly to companies in her portfolio. Even if an angel offers some names, it may be helpful to ping startups that weren't included. This is many time referred to as “off-balance sheet” reference checking. Call companies that have both done well and perhaps not as well—you'll want to know if an angel holds an even temperament during both times of success and times of challenge. Seasoned angel investors understand that more often than not, a company’s journey ends in challenge, and that winning as a startup investor requires keeping an even keel when startups don’t work out.
3. Avoid control freaks
Good investors understand that their angel-sized contribution of capital does not equal control, or worse, dictatorship. The pitfalls here are fairly obvious, as a founder could spend an outsized amount of time dealing with a single angel investor, managing his or her demands and expectations. Beware of larger investors used to having sway going in on what is a smaller-than-normal round for them. Ben Horowitz warns of VC investors in angel rounds who behave like VCs, which can "jeopardize subsequent financing rounds." The same is true of angel investors who invest with undue expectations of control.
4. Do your homework, but optimize for speed
Some investors bring enormous additives with their cash, but many don't. Most will claim that they do, especially when your round has gotten popular. Concentrate on getting a couple good keystone investors to anchor the round, and then fill it out, as quickly as is reasonable with investors who have good references and don't seem to be over-promising in their capacity to help. Fred Wilson of Union Square Ventures writes on this: "My advice is to make good decisions and not try to make the very best ones. Focus on deep pockets who are known to follow on and be supportive and avoid troublemakers. Everything else is a nice to have but not a need to have."
5. Look for the angel who thinks for him or herself
Investors hate saying no for many reasons. Nobody wants to pass on the next Facebook, but all investors want more proof, more data, and most will remain indecisive, not saying yes, and not saying no, for as long as founders let them remain indecisive. Look for decisive investors who like or don’t like what they see and can make the call for themselves. Be wary of investors who haven't committed to investing, but who are eager to introduce you to their friends and other investors. They're likely dredging for some form of affirmation from others. Such expeditions will sap founders of time and likely lead to zero investments. Introductions from an investor that hasn’t invested or hard committed to invest are typically worthless since that investor’s inability to form an investment decision sends a negative signal to the other prospective investors. Founders should, however, accept introductions from investors who have already invested, or given a hard commitment (agreeing to invest a specific amount or range of capital at specific terms). These investors' passion for your company will help convince others to get involved. Follow these virtuous networking cycles as far as possible—or until your round is fully subscribed.
6. Think ahead: the angels in this round could affect VCs in the Series A
A startup's cap table provides future prospective investors something of a resume and pedigree check. VCs will judge companies on their past investor list, preferring to see experienced hands rather than unknown and unpredictable players. All other things being equal, it's better to have angels with more proven backgrounds of picking winners on your cap table than anybody else. Some angels are themselves indicative of elite VCs following on later. That being said, you can’t sit back and relax just because you raised from one of these top tier angels. Raising a Series A is still a testament to the company you’ve built and your anticipated future trajectory (and you are very far from “mission accomplished” even when you do close your A round).
7. Try to keep your angel investor group diverse
Experienced investors trump green ones, but after that requirement, founders should look to fill their rounds with people with different backgrounds and expertise. A couple of 'name brand' investors are great, but a round needn't be full of them. Chris Dixon of Andreessen Horowitz advises startups to "pick some people who are connectors—who can introduce you to key people when you need it." Varying this group of people by geography and industry can also be helpful, Dixon notes.