Fundraising is sales, and as any good salesperson will tell you, the first step in the sales process is qualifying or vetting leads. In other words, it’s deciding, based on pre-determined criteria, how likely a lead is to buy what you are selling. You can either spend 10 hours trying to convince a lead that will never buy from you or 3 hours talking to a lead that is eager to buy, or invest in this case. The best sales people are savants at identifying those prospects that are easiest to convert, and you’ll be well-served to do the same.
Below are some common criteria to consider as you develop your own profile of your ideal angel investor.
4.1 Availability of Funds
Obviously, the first thing you want to know is whether they might have enough wealth to make an investment in the first place.
For example, perhaps your friend is a lawyer and is making pretty good money, but she has tons of debt from law school and has to pay for private school for her four children. You know that she’s constantly complaining that she can barely make ends meet. In that case, you can be pretty sure, even without asking directly, that she does not have an extra $25,000 that she can invest in a high-risk, early stage venture.
Sometimes it’s fairly easy to figure out if an individual has enough wealth that it would allow him or her to make an investment. For example, perhaps you have a local entrepreneur in mind, and you read in your local newspaper that her company was recently acquired for over $100 million. Changes are pretty good that she is able to make an angel investment.
Even if you aren’t sure about an individual’s wealth, you can categorize them as yes, no, or maybe, and prioritize those that are in the yes category.
4.2 Industry Experience
If you are developing, say, a digital health app, you probably want angel investors that have worked in the medical industry. Perhaps doctors, hospital executives, and consultants are most likely to truly understand why the problem that your company is solving is meaningful and why your solution is valuable and unique. If you were to pitch your digital health company to a restaurateur or an oil executive, they might not get it and also not be able to help you by making connections and providing advice.
Likewise, if you are starting a restaurant chain focusing on fast, healthy food, a hospital executive might not be the best fit unless they have a personal connection to the problem.
This is why it’s worthwhile considering the angel investor’s industry experience. It very likely that they will be both able to better understand and appreciate innovations in a space that they know intimately well and be better able to help you in meaningful ways due to their expertise, connections, and insights.
4.3 Investment Activity
As mentioned above, the most active angel investors might not be the best fit. Perhaps very active angel investors won’t be able to provide the kind of support that you’d like. (Although, you might really care a lot more about getting their check right now!) It might also be extremely hard to get on their radar because more folks know about them. Or they might be investing in rounds that are significantly bigger than the round that you are raising.
At the same time, just because an angel investor has never made an investment doesn’t mean that they would make one in your company. They might also have more time to help you as a founder with connections and as a thought partner.
It’s up to you to decide if active or less active angels would fit your company’s needs and investment opportunity better.
4.4 Local Versus Remote
Angel investors often invest in their own backyard, but not all of them. Super angels might invest across the country and even the globe. Local investors can bring meaningful connections to local customers, talent, and co-investors. Non-local angels might bring connections to bigger markets such as California and Asia. Local angels might be easier to get to because you have better connections in your community than across the country. Once again, depending on your particular needs and circumstances, local angel investors might be a better fit, or not.
4.5 In Your Network or Not
Most angel investors will ignore outreach if it doesn’t come from their trusted network in the form of a warm introduction. You’ll want to usually prioritize those potential angel investors in your network first for that reason, that you might already have a bridge or at least a partial bridge to them.
You might not think that you have any angel investors in your personal network, but it’s amazing how even folks with very small networks are able to identify potential investors once they start asking around and showing their friends and family what they are building. More on that below.
4.6 Accredited Investor Status
If you’re new to angel investing, you might not be aware that not everyone is legally allowed to invest in your company. According to the Securities Act of 1933, angel investors in your startup, especially those with whom you don’t have a prior relationship, need to show proof that they are accredited investors. In order to be considered an accredited investor, an investor must meet at least one of the following conditions:
- A net-worth of at least $1,000,000 (excluding their primary residence);
- Income of at least $200,000 in the past 2 years (with a reasonable expectation to make this amount in the next year);
- or $300,000 joint income with their spouse (with a reasonable expectation to make this amount in the next year).
There are exceptions to the above for friends and family members. According to Rule 506, a startup may include up to 35 non-accredited friends and family investors in your friends and family round.
In addition, there is Rule 504 that, in some special cases, allows your startup to receive up to $1 million in angel investment (over a 12-month period) from folks with whom you have had a prior business or personal relationship. However, state laws often influence how this rule is applied.
If you are taking investment from someone that you just met, you almost certainly need to ensure that they are an accredited investor.
Speak to a lawyer if you are planning to take money from friends or people with whom you have a prior relationship to make sure they don’t have to be accredited.
You will obviously want to prioritize those potential angel investors that are family, very close friends, or accredited investors.
4.7 Other Qualifying Criteria
There are many other things to consider when qualifying your angel investor leads. For example, if your startup is an impact-oriented company, you’ll want to prioritize folks that are very mission-aligned. Or if you are starting a luxury restaurant brand, you’ll probably want folks that identify themselves as “foodies.”
The most important thing is to create and implement a system whereby you rank and prioritize those potential angel investors that you think will be easiest to convert and write a check. Often the best way to do this is in a spreadsheet where each row is a person and each qualifying criterion is a column. More on this in Chapter 6.
4.8 Prioritizing Outreach to Angels
Once you have gone through your entire list of potential angel investors, the second most important thing is to prioritize, putting those that are most likely to invest (or the best fit) at the top of your list.
This is critically important because fundraising is sales, and if start with leads that are not well aligned, you will waste your precious time, have little success, and will likely run out of time, money, or motivation.
And don’t stress if your qualification and prioritization aren’t perfect. They won’t be, but they will be good enough to help you focus on those potential angels that will most likely result in a fast check, and that is 90% of the battle.
About the Author: Sergio is Managing Partner at Beta Boom, a pre-seed and seed fund investing in startups building the future for women, ethnic minorities, immigrants, and rural populations. His personal mission is to level the playing field for underestimated founders and empower them to build huge, impactful businesses.