Friday, November 11, 2016

Always be Closing - How to be a Lead Investor For Other Angels

Angel investors provide startups with their expert counsel and own capital but lack the financial fire power of larger institutional funds. They can overcome this frustrating situation and increase their level of involvement and influence by becoming lead investors and inviting other angels to pool money and add complementary expertise. This larger brain trust and combined rolodex of a team of experienced angels can be a significant help to a startup CEO. In fact, the right ‘dream team’ of advisors can deliver unique expert counsel that small VC firms are unable to supply. This approach also allows other angel investors to invest in areas outside of their comfort zone.
Attracting additional angel investors can be a daunting task. The opportunity needs to be marketed and sold to other investors all the way from getting their attention to closing the deal and defining an ongoing engagement model.
These syndicated deals provide the entrepreneur with efficient access not only to funding, but also to a set of angel investors with a broad set of skills and a willingness to help the venture post funding.

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To start, the lead investor should be familiar with the industry and work with the startup to understand the basics of the business. The lead should also conduct a thorough background, and potentially criminal, check of the founder. Pre-existing term sheets need to be well understood. If there are issues with the terms, they need to be made transparent before the process commences. The lead investor should come into the deal in a clean way, and not as an advisor who has been compensated with cash or stock. Conflicts are not uncommon and should be disclosed.

The founding team and the lead investor need to work hand in hand during the critical stages in selling a deal to other angel investors: Getting attention, creating interest and due diligence, and closing.


The lead investor’s first task is to attract the attention of the other investors. Angel groups are ready made vehicles to expose opportunities to like minded investors. These investors in turn may have additional, ‘secondary’, ecosystems they are interacting with. The communication with angel group investors largely follows a two step approach starting with an executive summary,  followed by a group presentation. The lead works with the startup on their summary and presentation and uses it as a mechanism to refine the strategy.

Interest and Due Diligence

Angels are interested in new investing opportunities for many different reasons - some believe in certain markets, others in great founders, and others are looking just for good investment opportunities. Ideally, all three come together.

This due diligence phase is also one of discovery for the new angel investors, even if the lead and other angel groups have already done own due diligence. Spending more hours on due diligence correlates with greater returns. Angels want to learn from the entrepreneur, and they also want to learn from each other. They prefer to learn by directly interacting with the founders and with each other in in-person meetings. In this phase, the lead should reach out potential investors who can add significant value but who may not have been interested initially. As the due diligence team attracts other investors, the lead should recruit investors with complementary skills and experience, e.g. in IP law, relevant technology, target market etc. Lead investor and founder should have identified these skills prior to closing, and make the introduction between the startup and these angel investors.

Ideally, the lead investor crafts a short 2-4 page due diligence memo to summarize investment thesis, market size, customer needs, uniqueness and competition, financial projections and funding strategy, exit strategy, deal terms, risks and what needs to be believed, and a leadership assessment - the memo doesn’t have to have the extent of Roelof Botha’s now classic Youtube investment thesis. Expected valuation, existing terms, traction, and team background influence investor interest. The founders should set up a due diligence web site, and the lead investor can organize a  feedback site for the interested investors only. Negative information that is obtained during the process needs to be disclosed.
The number of interested investors is likely to drop significantly during this phase, often as much as 75%. The number of potential investors may matter less than their qualities and contributions: Some angels have great expertise, some are great connectors, and have large funds.

Decision and Action

The due diligence phase has been completed. The lead investor negotiates the terms and changes to the terms on behalf of the other investors and may be negotiating directly with the company's attorney. Preferably, one of the investors groups has their own independent attorney to do the investor negotiations.

Interested investors have said ‘yes’ to the opportunity, but they haven’t written the check yet. The angel investors are seeking affirmation that this is a good deal, and the lead needs to convince the investors that they really want to invest in this opportunity. Simple distractions created by other competing deals and vacation absences can be reasons for potential investors to drop off. In fact, in syndicated deals it is not uncommon for the number of potential investors to drop off by more than 50% from the previous phase. One helpful tactic is to to keep up the sense of urgency by tightly managing the time between the due diligence and deal term completion. Lowering the valuation can also help to get a deal done. Enthusiastic support from other members of the due diligence team can be helpful in attracting a broader interest from other angels.

The lead investor takes the deal all the way to closing, making sure the legal paperwork is correct, signed, and the funds come in from all who committed. After the close, the lead investor typically stays involved with the company either as an advisor or board member.
In closing: Convincing additional angel investors to come in on a deal is difficult. Success for the lead investor should be defined by the process, and not the outcome.

Thanks to Karen Riley, Ken Arnold, Don Lee, and Bob Kyle for their insights and comments.

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