When you hear someone say they are an “angel investor,” you may assume they have access to a large disposable income (either $1M in assets, or income >$200k), but many invest $5,000 as their early-stage investments and look to grow into larger deals over time.
If you use a resource like AngelList, equity crowdfunding you can invest as little as $1,000 in a single company or up to $5,000 in 30 companies. There are many options at your disposal if you’re looking to dip your toes in the investing waters.
That said, angel investing can be risky because there is no short-term reward and many startups may shut down in as little as two years. Many angel investors only invest what they are comfortable losing. It requires patience, due diligence and, often, support for the startups you select to include in your portfolio.
Like all things, becoming an early-stage investor takes practice, includes a learning curve and may become a long-term hobby or passion.
Himanshu Sahay is a software engineer at Snap Inc., Bird and Tinder who I recently heard speak on this topic. What I love is that he has “hacked” his investing network to invest in deals during COVID-19.
Sahay decided to take his passion for tech and begin investing in technology companies he believed in, particularly those who could use his expertise in engineering and consumer technology as a strategic angel investor. According to Sahay, “Transparent deal flow sharing could be one of the key tools to increase the number of operator angel investors, and grow the overall startup economy due to leveraging trusted sources with valuable operational experience.”
I had the chance to interview Sahay:
SE: Did you develop a plan before you made your first investment and when did you know it was finally time to start investing?
HS: I first branched into startup advising to provide my expertise in mobile engineering and consumer technology companies to startup founders. After a few productive experiences on this front, I quickly realized that I wanted to have more skin in the game when it came to the success of these startups. I was lucky enough to already be talking to successful founders from strong backgrounds such as Y Combinator and used my advising experience to get my foot in the door as an investor. I became what is known as a “strategic angel”, still providing my engineering and consumer technology expertise in addition to my network, while investing into the company’s fundraise as well.
SE: It can be overwhelming to think about “being comfortable losing what you invest,” how do you deal with (or not) that you could lose your investment?
HS: Investing in startups is not that indifferent from investing in public companies. The core principles are the same - you want to pick the best founders tackling interesting problems with huge potential upside and downside risk mitigation. There are pros and cons of course. There are a myriad of reasons that you may not anticipate that could cause the startup to fail. But you also have an intimate understanding of the founder and the business because you have direct access to them, and can help influence the outcome of the company.
In theory, you could lose your entire investment. But if you have some safeguards in place while investing, this is seldom true. I know several angel investors who’ve been investing their entire net worths and have done very well.
Concretely, let’s say you make 10 investments of $10000 each. Assuming you’re being very picky and investing in the best founders (and have access to the deal flow to enable this), out of the 10, let’s assume 5 will fail. Now, let’s say another 3 willl return 1.5x, basically just returning your investment and then some, and finally, 2 return bigger amounts. Since you’re investing in pre-seed, seed and series A companies, this return can be staggering. For argument’s purpose, let’s say one returns 5x and the other 15x. This means that you will recover $245000 on an investment of $100000, and the numbers we’ve used are fairly conservative. Returns at the order of 50x and more are not uncommon if you’re making a lot of bets.
At the end of the day, I don’t think you should invest in startups purely for financial motives. You have to have a level of interest in the startups themselves and in the idea of seeding the future, when you’re investing in these companies, so that you can stomach the uncertainty and long timelines.
SE: How are you identifying the companies you choose to invest in? The landscape can seem very overwhelming for those looking to get started.
HS: I started with a top down approach. Choosing the company stage, then the type of founder and finally, the areas where I can provide my expertise as an angel investor. I am vertical agnostic, although I tend to look at a lot of marketplaces, fintech and SaaS companies.
I talk to a lot of founders from the Y Combinator, Stanford and Harvard networks, since I have access to those through my personal network. I’m fortunate that a number of my close friends are angel investors as well and we share deals with each other frequently.
For those getting started, I would implore you to reach out to everyone in your network working on anything interesting and to make it known to everyone that you’re looking to invest in companies. You’ll be surprised at how many people bring you deals. I speak to 6-8 companies a week, and almost all of that deal flow is incoming, through different people in my network.
SE: How do you actually go about “making a deal,” with a startup founder? How long does the process typically take?
HS: Most deal terms at the early stage are standardized. They’re typically SAFE notes which don’t require much more than a signature on the investor’s end. There are other terms that may be negotiated in addition, such as a discount percentage and pro rata rights on future rounds.
SE: Do you have to dedicate a significant amount of time mentoring or being available to the startups you’re investing in? How much of a role do you take on for each investment?
HS: Since I typically come on as a strategic angel, my value add to companies is my time and my network. I make myself available to my founders as much as needed. This may be in the form of formal product brainstorming meetings, looking over the roadmap, meetings with the engineering team, coming up with interview formats, reviewing interview transcripts and more. Outside of scheduled calls, this may also involve connecting the founder with engineers to hire, with other investors and with people who could be useful to the business.
SE: Let’s talk about the heart of this interview -- transparency in deal flows. What does that mean exactly and why is it so important?
HS: This is the idea of sharing your deal flow openly within your network and sharing your ideas about each company openly. Angel investors often share deal flow with others in their network but these networks can be small and insular. I have made efforts to expand my network to encompass people at all levels of the investing paradigm - from angel investors like myself, to early stage funds to more traditional VC funds and even growth equity funds at later stages. This is important because I can add value to different stages of companies through my network.
SE: How is deal flow transparency working for you and the recent investments you’ve made?
HS: I write a weekly newsletter where I share my deal flow with these investors in a structured manner, providing not just info on the companies, but also my thoughts on each. This has been a tremendous value add to both founders and investors. Founders get access to more investors through it, and investors get access to more deal flow outside of what they’re seeing. In the short time I’ve been doing this, I’ve already had multiple co-investments from the newsletter.
On a larger scale, it has given me access to a number of other investors who I share ideas and deal flow with, and has led to a significant increase in incoming deal flow as well. It has also led to an offer to become a Venture Partner at a VC firm, Predictive VC, which I recently accepted.
SE: What does it take to initiate the conversation about deal flows with other investors? How do you even find them to talk about it?
HS: Venture capital is very much an insiders' world, so you have to first break in, in order to have those conversations. Having worked as an engineer at top consumer technology companies, I was fortunate enough to know some insiders on the investing side as well as top founders. I also reached out to several people in my network who made introductions for me that I was able to break in quickly. Positioning myself as a strategic angel, I became the person investors would reach out to when one of their companies was looking for a strategic angel with mobile engineering expertise or experience in consumer technology.
Finally, I turned to my experiences building community in other aspects of life in the past, and applying them here. I believe in adding value early and often when I meet someone and I ask for nothing in return. This has been a tremendous resource for me in the angel investing world and has led to meeting lots of people very quickly.
SE: What are “red flags” new angel investors should look out for before making an investment?
HS: I have a simple framework I follow when evaluating founders and companies. The vision of the founders is really important to me and if a founder isn’t able to answer that question concretely, that’s usually a red flag for me. Further, founders that are looking for quick exits are also not what I invest in. Most of the colonies I talk to have non-material revenue and are often pre-product, so I’m betting on the founders’ ability to steer the ship to a successful future. Hence, signal on the founder is most important to me and I try to look for multiple data points in that regard. The founders I talk to are often only one degree removed in my network and I ask mutual connections for some signal on the founder as well, either old coworkers, friends or other investors who have spoken to the founder. Negative signal here often results in a no for me. Finally, although I have invested in some first-time founders, I am usually wary of doing so.
SE: What’s one piece of advice you’d offer to someone who is considering making their first angel investment?
HS: Rip the bandaid and make your first few investments quickly by relying on others in your network. You won’t quite understand the game until you have some significant skin in it.