TBC: Types & Motivations of Angel Investors

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Hey everyone, welcome to another episode of the Back Channel. In today's episode, I want to talk about a type of investor that you're naturally going to run into in the earliest days of almost any company, and we'll talk a little bit more about the details behind what their motivations are, the different flavors of them, and what I'm talking about are angels.

So I think a lot of people understand that there's this type of investor called an angel out there that you might be able to go after, but no one really breaks down the different formats, the different motivations. But no one really spends the time to talk in detail about this. So that's what we're going to try to do today.

I want to talk about angels because it doesn't matter how effective you are as a [00:01:00] fundraiser or how much experience you have or how fast your company is going to grow. There's almost always an opportunity to bring angels on board for a variety of different value adding reasons. One, it's good to have good people around you.

Two, angels can bring a lot of value besides just capital. And three, sometimes before you get started and if you don't have a track record, that's the only capital that you might have access to. But before we get into thinking about how you convince investors, I want to talk about the different styles of angel investing that there are.

Now, people might think about this normally on just a One dimensional scale of call it your aunt and uncle on the left all the way to a professional angel who's managing a big amount of capital and knows how to invest and is just doing their own investing on their own dime. But I think about it more as a two by two matrix.

On one axis we have how much money does that angel [00:02:00] have, And on the other axis, we have sophistication. How well do they know the angel investing game, especially early stage technology startups and investing in them and how well they understand managing their portfolio and a portfolio of early stage bets.

So that's the other axis that you think about. And when I talk to founders about how they should be handling different angels, They should understand where the least problematic investors are, and the quadrant of that two by two matrix that they should definitely avoid.

The obvious one is in the bottom left hand corner of people that don't have a lot of money and don't have a lot of sophistication. They may want to support you, but if they don't have a lot of money and they don't have a lot of sophistication, that is going to be way more of a headache than their dollars will actually be worth.

They are going to be really stressed about the money they invest in you because if they invested a decent amount of their [00:03:00] money and it looks like they might lose it, they might be bothering you a ton. And then you might be really stressed, especially if it's a personal relationship about losing a big chunk of someone's net worth.

So, while a lot of us might be really anxious about finding dollars anywhere, I'd highly recommend you think about people in the bottom left hand corner of this 2x2 matrix people with not that much money and a low level of sophistication and just avoid those dollars. Now in the other opposite end, the upper right hand quadrant, we have the very, very rich people who have been startup founders themselves who completely understand the game.

Now these investors will be the least problematic if you can convince them to invest.

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Now, the motivations for a [00:05:00] professional investor with a lot of money probably veer more towards the understanding of their portfolio and needing your company to match their portfolio expectations, moonshots, etc. And so, if you can get their money, they're going to be great.

They're going to understand exactly what it means to invest in an extremely early stage company and they probably have other ways to be helpful. So if you can grab those people, that's amazing. Now the middle grounds are people that don't have a lot of money but have a lot of sophistication. I would consider myself in the early days of my investing career in that state, which is didn't have enough money really to be successful.

Messing around with investing, but had a ton of sophistication. I had been at technology companies. I had been in startups. I had been at a venture capital firm. And so those people will be great on your cap table. They could actually pack way more punch than other bigger size checks that [00:06:00] don't have as much connection.

Or as much sophistication. But, you might be taking a big portion of their net worth and that might make you feel some sort of way. Might give you a little bit of anxiety. But, you should just know that the people that are making those gambles are high in sophistication. So they know what they're doing.

They just don't have that much money. So you can take that dollar, you just have to understand what it is. On the other end of the spectrum from that quadrant, you have the people that have a ton of money, but low levels of sophistication. Now, depending on why that, that investor is investing in you and what that personality type is, this can be a problematic quadrant to consider because these are maybe easier dollars to capture in terms of your, your sort of pitch and your fundraising process.

But once that money is in, Depending on where they are in this, on the wealth scale, they could be problematic. They have [00:07:00] enough money to lose, but not enough money where they just don't even count the money. And in that case, with low sophistication comes a relatively healthy check size, But a really annoying person on your cap table.

Somebody that is expecting weekly updates, expecting you to jump on calls with them, expecting you to run strategy by them. And that to me is a check that you don't want on your cap table. Now, this is going to be harder for you to follow because as you're looking for dollars, if you can convince people, and an old retired dentist decides that they would be open to investing 50, 000.

All I would say is spend some time with them, feel it out, make sure that you understand what you're getting into. Make sure you talk to them a little bit about what they should expect from you. And if after all of that, it seems to pass your stiff test, then go ahead and take that dollar.

But don't say I didn't warn you. This could be really annoying down the road. Okay, [00:08:00] so those are the different types of angels on my 2x2 matrix of sophistication and wealth. Now let's talk about motivations.

Motivations are important for any type of fundraising conversation so that you know what to bring to the table when you're actually pitching someone and trying to convince them to invest. It's kind of like this idea of getting into the mind of the buyer. Motivations can be anything from wanting to support you, this is where friends and family come in, right?

They just want to help you support your dreams, all the way to I run my own portfolio of investments and I need it to Match my portfolio strategy the same way a formal institutional venture capital investor would Somewhere in between someone that is sophisticated Somewhat but really just like supporting entrepreneurs and wanting to be part of good business Ideas, wanting to be a part of interesting companies, and wanting to support people that they like.

There's a likability factor in there. [00:09:00] So what I would help you understand is that each of these pitches can sound slightly different. They can take on a different format, and it's important for you to understand what you're getting into before you pitch those different types of angels. So, I hope that understanding the 2x2 matrix of wealth and sophistication, plus the range of motivations that angels have when investing, will help you in your pursuit of those initial dollars from angels.

Alright, I hope this episode of The Back Channel was helpful for you, and we'll see you next time.

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