Five Funding Sources for Startup: Angel

Established Angels, Angel Groups, Entrepreneurs, Retail Investors, Investment Crowdfunding
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In the prior three installments of the five funding sources series -- and I do recommend that you read all three -- the sources I covered share a common trait in that investing in your startup is not their primary role.

Customers, of course, play a much more vital role as your company's lifeblood. If an investor sours on you, you're in trouble. If your customers sour on you, you're done.

Self is you. And your role is to build the best product and best company that ever existed. Your investment, in terms of cash, will play its part in getting all of that started, but your time, your energy, and your leadership are the most valuable resources you can contribute.

Friends and Family bring their own issues along with their investment, and those issues will mainly revolve around managing your relationship with them as investors. That said, their existing relationship with you -- as friend or family member -- will, in most cases, come first.

With each of the final two funding sources, their primary role is as your investor. There should and most likely will be added value from these sources, in everything from connections to advice to even office space. However, when the documents are all signed, these investors are expecting a return on their investment.

So let's talk about who they are.

Funding is the most complex part of startup. How, when, and why you get funded is an individual series of choices, and every startup will take a different path. No one strategy is better than another, but you should definitely have a strategy in place before you raise a dime.

Angel investors are individuals who invest in private companies as a part of, or in lieu of, a portfolio of retail investments, like stocks or real estate.

Angel investors are actually kind of hard to pin down, and thus are sometimes the most overlooked source of capital in startup. This is not surprising though, because it's easy to get confused about the definition of an Angel, their role, and how to find them.

If you think of Angels as people with a lot of money and high risk tolerance, you're not too far off. They invest their own money. They can operate independently or as a part of a group. Some specialize in certain sectors or technologies, while others invest in whatever they think is cool. Some take almost no active role with the startup, others will want to be a formal advisor or even a part of the management team. Some make a lot of investments, others might make only one or a few.

So just about anyone with money can be an Angel, right? Well, that's close.

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Established Angels are accredited investors who invest in startups. These are individuals who meet a definition handed down by the SEC that states that in order to invest in private companies, they must meet and maintain certain income or net worth minimums.

Established Angels usually get involved with the company early, and sometimes even invest pre-revenue, a situation where the company needs funds before they get to customers, and has enough intellectual property -- or even just a good enough idea or track record -- to merit a high valuation, worthy of a riskier investment. But Established Angels can also invest alongside Venture Capital (VC) investors.

They're basically independent operators.

Established Angels usually invest smaller amounts for smaller pieces than the VCs, with the expectation that their early investment is worth more on a per-share basis than later investments. Established Angels will also often invest in convertible notes or SAFEs (simple agreement for future equity) at an early stage, both of which act more like loans and allow the valuation of the company to be determined at a later date, once the startup has made progress towards its goals.

Established Angels usually invest anywhere from a few thousand to a few hundred thousand dollars. Beyond their cash however, most Established Angels can be invaluable for their experience and connections, even opening the doors for warm introductions to Venture Capital investors.

Some Established Angels will be a part of your local startup community, others won't. A great way to find them is to talk to entrepreneurs you know, especially those who are raising or have raised Angel or VC money, and ask about who they've worked with. Remember, individual tastes and tolerances for Angels vary, so ask your colleagues about ALL the Angels they've worked with, whether they landed the investment or not.

I believe we will see more Established Angels emerge, let's call them rich people again, who meet the SEC accreditation requirements but who have never made an angel investment because they were either unaware of Angel investing, unaware of the growing number of investable startups in their area, or just plain didn't know enough about startup to have any interest in Angel investing.

Angel Groups are just what they sound like -- groups of Established Angels who have pooled their money and their resources into one fund. This allows them to spread their personal investment over a larger number of startups, which also, theoretically, lessens the risk.

While Angel Groups can and sometimes do invest larger amounts than individual Angels, they usually stick to Angel-level amounts per startup, just across more startups.

Angels usually operate on the assumption that they will make, say, five investments (that number is arbitrary), and one of them will return enough to more than cover losses from the other four. This is what I mean by high risk tolerance.

Angel Groups can increase the denominator of that equation substantially, allowing an Angel to have a shared personal stake in 10 or 20 startups or more. However, this doesn't necessarily lower the risk, as failure is failure, and failure doesn't care how many startups it takes out.

But that larger denominator means there's more opportunity for more startups to get funded through Angel Group investment.

Angel Groups also pool their resources when doing due diligence on potential investments -- in other words, they're going to go over your startup with a fine-tooth comb to understand the risk and the value of the their investment. They also sometimes share resources like connections and advice, for the startups they make investments in. They may be able to help your startup in several areas -- technology, marketing, sales, and so on.

Angel Groups usually thrive in areas where there is a lot of startup activity, but not a lot of available capital. They don't necessarily market themselves, but they are easier to find than individual Angels.

Entrepreneurs are a sub-type of Established Angels and they make great Angel investors, whether they're an active Entrepreneur now or were active a long time ago. The experience that they bring to the table is going to be as valuable as their investment, and you can bet that if an Entrepreneur investor is interested in your startup, you can claim at least some credibility as a viable startup investment.

This is also the one case where I would recommend that you actively try to get the investor involved in your startup, preferably as a formal advisor, but perhaps even as an early board member.

A bit about startup boards -- this is the committee that serves as management of the management of the startup. I know that's a bit convoluted, so look into board membership during your initial fundraising efforts if you're going after Angel or VC investment. Oh, also, don't make any other type of investor a board member, especially those from Friends and Family.

Entrepreneurs are usually the quietest about their investment availability, especially those that have had success, because there are usually a lot of people clamoring for their time, be it for advice or connections or investment or whatever. You should be one of these people, especially if the Entrepreneur's success has been in a field related to yours, but remember, you're one of a lot of people doing this, so be respectful.

And yeah, I realize I'm an entrepreneur telling you to be respectful to entrepreneurs. I'm just speaking from experience, so I'll also say be respectful to everyone.

Retail Investors are included here because they're the newest type of individual who can invest in startups, and the expectation is that they will operate in almost the exact same way as Established Angels.

New legislation has been passed -- the JOBS Act at the Federal level and also in many states in the form of securities law exemptions -- to allow anyone, regardless of income or net worth, to invest in startups. Because of this, we're finally going to see Retail Investors become a significant source of startup funding as new offerings come online via this new legislation.

This shouldn't create a huge boom in startup investing, especially right away, since most traditional Retail Investors are by nature very conservative -- in other words, they hate risk. But there will be some, and there will be more over time.

One trait to bear in mind with any new startup investor -- for most Retail Investors, there will be a learning curve. This could be good, in the sense that they won't be carrying any baggage from prior investments or old-school ways of thinking. It could be bad, in that they may know less about startup than you, and they may need some handholding.

Either way, it's something you'll have to deal with.

Retail Investors also may not have the breadth or depth of connections that Established Angels will bring with them. But look, everyone has connections, and if someone has the money and the will to invest in startups, chances are some of their connections will be valuable to you.

It's tough to find Retail Investors, unless they somehow fall into your Friends and Family network or they make themselves known within your local startup community. But again, ask the entrepreneurs you know.

Investment Crowdfunding is a relatively new phenomenon. This is a specific type of investment, and often gets confused with the broader and more well-known term "crowdfunding." Investment Crowdfunding is not Kickstarter or any other donation-based or early adopter purchase program.

There are several types of Investment Crowdfunding that are currently being successfully used for startup funding. The most common one involves a legal entity set up to allow Established Angels to invest small amounts, usually a few thousand dollars and up, into a fund that acts like an Angel Group.

This is a "Virtual Angel Group" model, and it is being successfully used on many platforms like AngelList, Crowdfunder, and Microventures. In fact, these Crowd investing funds work almost exactly like Angel Groups with three distinct differences.

First, the Angels can usually invest much smaller minimums. This makes their due diligence and decision process easier, and promotes diversity to lower risk. Second, where
Angel Groups are made up of a diverse group of investors with many backgrounds and interests, Investment Crowdfunding funds are groups of angel investors that typically
have interest and knowledge about your business and industry. And finally, Investment Crowdfunding investors are mostly passive, but you may get help or resources from the people who manage the fund.

That covers the individual or groups of individual investors that may be your first source of outside funding. Next, we'll talk about the investors who have investors, and the group that most people think of first when they think of startup investment, the Venture Capital investors.

Read the entire Five Funding Sources for Startup series:
Customers
Self
Friends and Family
Angel (You Are Here)
VC

Read the entire Five Roles of Startup series:
Vision
Build
Sales
Operations
Growth

Read the entire Five Stages of Startup series:
Level 1: The Jump
Level 2: Start
Level 3: The Journey
Level 4: The Grind
Level 5: The End

Read the entire Five Kinds of Startup series:
Product
Service
Digital
Retail
Hybrid

Read the entire Five Reasons for Startup series:
Independence
Wealth
Common Good
Personality
Elimination

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