Angel Investing

May 12, 2017

Last year, I started dipping my toes into the mythical pool of angel investing. Unfortunately, I found little resource anywhere about how this whole thing actually works. Lots of what I’m writing here comes from my personal experiences and talking to experienced angels/mentors.

Angel investing, like any other type of investing, is all about probabilities and numbers. The Law of Large Numbers definitely dictates here; at the end of the day, it’s all about diversification. The difference is the risk factor, which is magnified exponentially. Most of your returns will come from 5–10% of your portfolio that actually exits with ridiculous valuations (5x, 10x or even more). You can assume the rest to go to zero.

An angel investor’s portfolio will follow a J curve, just like typical venture capital funds. Companies tend to fail early; successful companies tend to take a long time to emerge and exit. Since most angels get their money back during liquidation events, and the average holding period for an angel is around 5–10 years, it’s definitely a long term commitment. It’s quite likely that after 5 years, your portfolio will still be worth less than your principle.

Quite a few people I met confuse angels with VCs. It’s important to understand that angels are mostly individuals who are investing with their own money. Hence, they may take things a little more personal. Also, this means that they tend to have limited amount of capital. However, the upside is they usually make decisions quicker and there are probably a lot more of them around. Also, if your company is at seed stage, it’s highly unlikely for a VC to talk to you (excluding super angels and incubators).

To a former entrepreneur, sitting in a pitch session can be both familiar and foreign. When speaking with entrepreneurs, you have to constantly remind yourself that it’s now your job to ask as many difficult questions as possible, especially questions that you previously feared as an entrepreneur. Here are things I tend to ask for:

** It’s important to note that in a seed/angel round, there’s usually no requirement for the startup to provide disclosure schedule or prospectus. Don’t expect any.

After the pitch meeting, I’ll usually go home and do more detective work online and offline about the following:

There are many methods to calculate the valuation of a startup. It’s a very complicated topic, which definitely deserves its own series of posts. Keep in mind that no matter what methods you use, valuation is always going to be subjective. All the math in the world can only get you a ball park figure. It’s completely up to the entrepreneur and the investor to figure out what the compromise should be. Personally, I use a combination of methods listed below to find an average.

Besides understanding basic valuation, an angel should also understand the more complicated math behind varying/changing valution in the same round, most notably, a rolling close of convertible notes with different values. Not all angels are valued equally.

Briefly, some of the common methods to calculate startup valuation are:

A good resource to look into is Bill Payne’s blog. I believe Golden Seeds also has some writings on startup valuation.

The terms of investment vary greatly on a case by case basis. I’m not a lawyer, so please see my disclaimer at the bottom of the post. Generally, you should familiarize yourself with these concepts:

Two of the more common structures I’ve seen recently are:

The choice of whether to go with equity round largely depends on the size of the round, and like all things, how much it would cost (time/money).

Since angel investing is such a broad topic, I don’t think covering it in one post would do it justice. Here are some of the topics I hope to cover with more depth in later posts:


I’m not a lawyer and I do not provide legal, business or tax advice. The accuracy, completeness, adequacy or currency of the content is not warranted or guaranteed. This post is not a substitute for the advices or services of an attorney. I recommend you consult a lawyer or other appropriate professional if you want legal, business or tax advice.