Amis and Stevenson have written the how-to manual of early stage investing with their book Winning Angels. Whether you are new to the world of angel investing or have been involved for some time, there are nuggets of advice and wisdom throughout. For the new investor, they suggest taking a close look within each of these categories: financial, family, personal, time, experience, other angels and risk to see if angel investing is right for you. (Amis and Stevenson) Angel investing is considered high risk and high reward and they believe knowing yourself and your risk tolerance is the first step. Once you decide angel investing is for you, use the 7 fundamentals of early stage investing put forth in Winning Angels to begin creating your investment strategy. Sourcing, evaluating, valuing, structuring, negotiating, supporting, and harvesting are the 7 fundamentals. In the weeks to come I’ll be exploring ideas around each one.
This week the focus is on sourcing–finding and recognizing entrepreneurial ventures that may be worth investing in. If a person is interested in being an active angel investor, he or she needs to create deal flow. Deal flow refers to the quantity and quality of the business opportunities and investment pitches that come to the angel investor. (Amis and Stevenson). If there is no flow, there is no potential for investment.
Winning Angels suggests many ways to create deal flow with a variety of preparation, networking, visibility and focused activities. (Amis and Stephenson). Accelerator programs can also create deal flow. Accelerator programs are established to help startups for a very specific time frame — oftentimes from 90 days to four months. (Clark) Ian Hathaway writes in The Harvard Business Review, that the accelerator programs provide support through education, mentorship and financing to early stage growth driving companies. It is an intensive, fast paced learning experience for the startup. The accelerator has a group of companies going through the program and gives capital to the startups to help them on their way to success. (Hudson) At the end, the start ups have a “demo day” when they pitch to investors looking to provide financial support. (Hudson)
How does the angel investor fit into the accelerator model? According to Marianne Hudson writing in Forbes, accelerators want to develop relationships with angel investors because one of their main goals is to secure equity backing for the companies in the program. (Hudson) Hudson suggests 4 ways to get involved with the accelerators:
- Accelerator meetings: The angel investor can hold meetings before the actual demo day with the companies. It can start the relationship for both the angel investor and the startup. It will also give the angel investor an early look at the different companies to see if they are interested in investing in them.
- Demo Days: Angel investors will see the CEO in a different way when they are pitching. After demo days, it is the accelerator that plays a big part in matching startups with angel investors to help move negotiations along.
- Mentoring: An angel investor can become part of the accelerator program itself. Depending on the investor’s time restraints, he or she could mentor throughout the whole 12-week program or perhaps teach a class on a specific topic.
- Scan Companies Across Many Accelerators: Angel investors can collect a one-pager about the companies throughout the different accelerators. This gives the investor an idea of what industries the accelerators are working with and if there is a company that fits into the angel investor’s investment strategy.
It is important to point out that there are many accelerators out there and they all perform differently. Y Combinator and TechStars are considered two of the best in the country. (Hathaway) Just as the angel investor must do its due diligence on deals, the entrepreneur must do its due diligence on the accelerators.
Amis, David, and Howard H. Stevenson. Winning Angels: The Seven Fundamentals of Early-stage Investing. London: Financial Times Prentice Hall, 2001. Print.
Clark, Bill. “Accelerators vs. Incubators: What’s the Difference?” MicroVentures Blog. MicroVentures, 12 Dec. 2014. Web. 25 May 2017. <https://microventures.com/accelerators-vs-incubators>.
Hathaway, Ian. “What Startup Accelerators Really Do.” Harvard Business Review. Harvard Business Review, 24 Apr. 2017. Web. 25 May 2017. <https://hbr.org/2016/03/what-startup-accelerators-really-do>.
Hudson, Marianne. “How Angels Can Get The Best Deal Flow From Accelerators.”Forbes. Forbes Magazine, 01 July 2015. Web. 25 May 2017. <https://www.forbes.com/sites/mariannehudson/2015/02/06/how-angels-can-get-the-best-deal-flow-from-accelerators/#1f098e88f3fc>.