Anyone who regularly reads this column knows I love AngelList. It’s the matchmaker service between promising startups and early stage investors which has revolutionized angel and maybe even VC investing. There has been a slew of recent articles on AL, including good ones from Venture Hacks, Venture Beat, and BostInnovation. But while there are a few guides on how to hack AngelList from a startup’s point of view, almost nothing exists for angels looking to get started. Which is where this blog post comes in.
I’ve put down a few the best strategies for angels to get the most out of AngelList—how to broaden your network, improve your deal flow, turbocharge your due diligence, and strengthen your existing angel investments.
I. You’ve Got to Be In It to Win It—Improving Your Deal Flow
Trust me on this, just open an account. It’s an unbelievable gift: there are no fees and no requirements for participation once you get in. Even if you only lurk on AL, being connected will make you a better investor—you’ll be more in tune with what is going on. But first you need to get on: you can register here.
Assuming that you are an accredited angel and you have participated in some deals (if not, you’re better off joining a local angel group to get started), the process is straightforward. Our first hack: get 4 members to endorse you, and you go straight to the head of the line. How do you find out who’s already on? The website is dead simple to explore, and you can search for angels by geography, name, activity level, followers, etc.
Setting up your Profile
Once you get accepted as a member, you’ll be asked to set up a profile including representative angel investments, the sectors and geography you’re interested in. How complete you do this is up to you; I haven’t noticed people listing their losers. I prefer to list most of my angel investments over the past 2 years, as well as displaying my linkedin profile and website. Consider this how you want to introduce yourself, because it is all public. Here’s my profile as an example.
Your Follows Determine the Quantity of Deals You See in Your Private Stream
Now the fun begins. Just like Facebook or Twitter, what you see is determined by who you follow. Any activity done by an angel you follow is sent into your activity stream, and it’s easy to be overwhelmed by the thousands of investors and companies represented on the site, especially if you opt into the public site instead of setting up a personalized, filtered site. If you were to follow me, you would get notified every time I follow a company, request an introduction, make an endorsement or comment, invest, etc. So you don’t necessarily want to follow too broadly at first. Rather than get swept away by the full force of the firehose, you might wish to start by just following 25 or so semi-active angels. There are a number of ways you can decide which angels to follow: you could just import your list of contacts from LinkedIn, Facebook or Twitter, and AngelList can cross-reference to see who of those is on AngelList. Or you can look up the most followed investors here. Note that oftentimes the most respected VCs on the list with big followings might not necessarily be the best people to follow on AngelList. Why? It is unlikely Fred Wilson, Reid Hoffman or Mark Suster (all of whom are on AngelList) are going to tip their hand concerning which startups they are interested in. Junior analyst VCs are just the opposite: they will take dozens of intros before even doing any hard diligence, as that’s their job–finding and then doing light scouting on hundreds of companies before bringing a handful of vetted leads up to their partners. Either way, I often find following either senior or beginning VCs creates too low a signal to noise ratio, so I concentrate mostly on active angels I respect. There are exceptions: some micro-VCs associated with incubators (e.g., Dave McClure) work AngelList hard to promote their companies…but you need to recognize that that is part of the brand strategy for their companies and their incubators. One of my first investments via AngelList was CardMunch, in which I co-invested with Manu Kumar, Mitch Kapor, and Dave. And while I wrote about all the reasons I loved investing in CardMunch here, I never would have known about the opportunity if I hadn’t followed those investors.
Consider AngelList more like Twitter and less like Facebook: you can add people or drop them, there is no shame of “unfriending”. For me, before I add someone, I check out what they show on their activity list to date. If it is in areas I want to invest in or learn more about, great. If not…unfollow. I may temporarily follow an investor whose portfolio I want to check out, but my follow list is fluid until I actually co-invest with someone, when I lock it in.
You’ll also be asked in your profile to define the areas in which you’ll want to see deals. You can define that geographically and/or by investment sector. There are no limits other than your ability to process information on how many sectors to look at. However, if you choose “World” as your geographic area, there are literally no filters, and filters are your friend. I have no interest in fashion, food, biotech, etc., and so I block those fields. But I want to see deals in mobile, location-based-services, fintech, and a few other areas of interest. So that’s what I include and what I see on my private stream. The breadth or focus of anyone’s private stream can be discerned in their profile. I don’t know for sure, but I’ll guess the narrower the stream, the more disciplined and the more insightful the investor, although undoubtedly there are some hardworking people who are the exception that prove the rule.
II. Turbocharging Your Due Diligence
So, after seeing a few dozen deals (including archives of deals you wish you’d seen when they were live), you get the hang of AngelList. But it may be a little scary being outside of the comfort of an angel group. The beauty of being in a group is less about gathering deal flow and more about learning via the insights of others. While AngelList may be decentralized, the ability to lean on others’ knowledge is at least as great. This can be done both within your current network and outside of it. Here’s how I approach due diligence on AngelList.
Before the Intro
Before I request an introduction to a company, I first check out what’s publicly available. Typically there is a slide deck, perhaps a video, links to a website, LinkedIn profiles of the key players, and a list of existing investors and advisors. I’ll click through everything that’s easily available, and more than half of the time I don’t go further, whether that be from some perceived flaw, too high a valuation demanded, or whatever. If things seem promising, I’ll then follow the company. In that way, I’ll stay abreast of all changes in status. (Don’t get carried away, however, if all of a sudden everyone is requesting an introduction. If you follow the herd, you’ll most likely get trampled.) If I still like something a few hours later, I’ll request an introduction. Thomas Korte, ex-Googler and founder of the San Francisco-based incubator AngelPad, says that while he’s a big fan of his companies putting themselves up on AngelList, some of the companies have found themselves distracted by non-serious angel window-shoppers piling onto whatever companies are receiving the most introduction requests. (There may be a solution for this coming up, as AngelList is beginning to post reviews of investors as well as companies.) If you see tons of other investors all requesting intros to the same company you want to talk to, take the opportunity at the introduction to give a little snippet about yourself to help persuade the company to take you seriously. But don’t sell yourself too hard—later on you’ll want to see if they gave as much effort to checking out you as you did to research them.
The Skype Call
Next comes a call to the CEO via Skype or some other video chat. (Phone is OK, but video is so much better.) Some angels have had success just riding on the coattails of others, but I can’t imagine making an early stage investment without doing my own due diligence.
The interview is the time to read the CEO and find out more about the company. In other words, no different than at any other angel pitch. And more often than not, companies flunk the interview. See “Why I Passed on Investing in a Hot Startup” and “5 Reasons an Angel Will Walk From Your Deal”. There’s nothing new to tell here.
There is, however, one aspect of due diligence that is almost unique to AngelList: checking how thoroughly the companies do their due diligence on YOU. If they take your call without having done any preparation, that implies they are just looking for a check and are wasting their chance to see what other strengths the investor can bring. But if they have taken the time to look at my list of portfolio companies, thought of what connections I might be able to bring, checked out my LinkedIn account, know where I’m from, etc., then I know that that the CEO is prepared and hungry. A simple question like “How do you think I specifically might be able to add value to your company?” will often quickly tell you whether someone has taken the time to prepare for your interview.
Leaning on Others Inside Your Network
Assuming the CEO has passed muster, then it is time to compare notes with your fellow investors. When I don’t have specific domain expertise, which is true more often than not, I like to call in the reinforcements. MomentFeed, for instance, had some great traction, persuasive management, well-regarded investors and was involved in a sector I liked, but I was (and still am) lacking sufficient understanding of their approach to mobile marketing. I asked Jennifer Lum (ex-Quattro Wireless, ex-iAd, investor in Peekaboo Mobile) of Apricot Capital to check them out, and Momentfeed passed her more sophisticated review with flying colors. Both of us ended up investing.
Similarly, I recently saw a company with an intriguing product in data storage using a novel type of architecture. They have an excellent advisor, a tested prototype, and might be a big winner with a differentiated and cheaper product. In this case, however, my friend Wayne, the expert I asked to check it out, brought out a number of potential problems which I hadn’t thought of. While it’s still an open question if I go in, my decision undoubtedly will be more considered due to my friend’s involvement.
I’ve co-invested with both of the angel experts I mentioned above, and I really value their judgment. The funny thing is that I’m not in an angel group with either of them, and it would have been hard to get their input on a similar deal if it hadn’t been on AL. But as a result of the instant networking available with AngelList, where colleagues can get up to speed on a company almost instantly, due diligence can zip along at higher levels than usual. One knock on AngelList is that many investors may get lazy and depend on someone else to do the due diligence, to the extent that no one does any. But I feel that’s more a critique of the investors involved rather than the software making it possible.
Going Outside: Looking Up Investors and Advisors
Sometimes, I need to go outside of my network. While I went into ScriptPad, GreenGoose, Saygent and UpNext after talking to folks I knew who were involved, sometimes you need to go outside to a new source. I invested in NoiseToys, for instance, after introducing myself to not one but to two Charles Huangs.
Checking in with investors is especially important in the 2nd round of a deal. AngelList will list not just current investors but also previous investors, which allows you to explore “signaling”, which can happen when an earlier investor chooses not to follow a round. If you see, for instance, Dharmesh Shah as a first round investor but not in the 2nd round, that doesn’t signal anything, as Dharmesh explicitly tells everyone that he’s a seed stage investor only and doesn’t follow in subsequent rounds. However, I’ve found more than once a company that has great name investors in the early rounds who have chosen not to follow in subsequent rounds even though following is their normal modus operandi. How did I find this out? They told me when I contacted them. For these investors, their reputation is worth more than any single investment, so generally they’ll be straight up about their reasons. It may be that key management doesn’t work well together, that customers hate the product, or some other flaw that you should be aware of. AngelList makes it easier to find the skeletons in the closet due to the ease of referencing within the network.
Handicapping the Endorsers—How sincere is the praise?
It’s difficult to determine the difference between who is good vs. who is merely active, but there are hints. I’m a believer in the “Where there’s smoke there is fire”, and so generally those investors with large followings probably deserve them, and I will give them good weight, especially if they’ve had any recent successes. I tend to do an informal signal-to-noise ratio. If someone has 1000 followers, I first look at their investments to try to understand why. But when there are 2 people with 1000 followers, and you can determine through someone’s profile page that person A has made 50 recommendations and endorsements, and person B has only made 5, I give more weight to person B’s comments if only for scarcity value. The more you dig in and research, the better you understand where they are coming from. Brad Feld recently blogged “Why I Won’t Game AngelList.” While I think his policy of not following is perhaps too strong, I applaud the big picture. If you discover endorsements where the angel ISN’T putting his own money to work, discount appropriately.
III. Expanding Your Own Network
The best leads come from your own portfolio companies. They are the folks on the ground closest to new technology, the customers, and their fellow startups. But a close second are co-investors from earlier deals. A particular beauty of AngelList is the ability to send private messages between those who follow each other. I first talked to Thomas Korte of AngelPad via private messaging on AngelList. He uses it often, and says that people tend to respond far quicker via AngelList than via normal emails or voicemail.
Follow Your Co-Investors so You Can Private Message
I’ve found this as well. Last week, I visited New York to see the current class at TechStars. Before leaving home, I remembered that Localmind had been delighted to add Peter Bordes to the investor group via AngelList. Via the AngelList/Localmind connection, we were able to connect at TechStars (Peter is a TS mentor as well,) where we compared opinions on the new vintage of TS companies, shared ideas and leads, and got to know each other better. I absolutely know that I’ll want to seek out Peter’s opinion on media companies going forward, and hopefully I’ll be able to return the favor to him whenever I have something to add.
It used to be that the rule was to stick to your geographical area when investing…but now as my list of co-investors/scouts has branched out to San Francisco, New York, Toronto and the like, I know that my opportunities to invest profitably has only expanded along with my network. I make it a rule to follow the investors who I co-invest with via AngelList. While I might not know them now, following them and keeping track makes it much more likely we’ll meet up going forward.
IV. Refer Your Own Deals
How can you not want your portfolio companies to attract investors with deep pockets, domain expertise, geographical diversity and broader connections? That’s the potential with AngelList.
I recently met 4 companies at MassChallenge who had put themselves up on AngelList, including founders of Fig, BrassMonkey, and Rentabilities, who all had success, and one other company that came up blank. Some of their stories made the Boston Globe. As you might expect, the three companies that raised money all were very positive on their experience, whereas the unsuccessful company only received one lowball offer.
One difference is that the three successful companies all had already landed a strong lead angel and had refined their pitch through the process. And those backers endorsed them on AngelList–just as you should promote your own portfolio companies when they need new money. (Nivi of AngelList disagrees strongly that a champion is necessary, but I’ll take the traditional view. See Seed Stage Capital’s terrific article for more on this one.) If you have found a company that has already landed you and perhaps others, think about sponsoring them on AngelList. Being listed doesn’t mean that they necessarily have to take the meetings or commit to anything, and there are no fees to pay. The companies can and should use the process to pinpoint the investors that would be the best fit, avail themselves of the help that Nivi, Naval and the AngelList team can give in terms of strengthening their pitch. And you as an angel have just made it that much more likely that your company will succeed. Even if a fund raise is almost over, having the company list on AL means that they will establish more data points for future investors—and as Mark Suster says, smart VCs invest in lines and not dots. It’s a no-lose proposition to list: encourage your portfolio companies to do so, and even if it doesn’t bear immediate fruit, it may lay the groundwork for success in later rounds.
A Few Final Thoughts
AngelList’s biggest problem may be that it becomes a victim of its own success. It’s like the old Yogi Berra complaint, “No one goes to that restaurant any more, it’s too crowded.” Some of the site’s success has been due to the high level of curation to date. Inevitably, as the site’s popularity grows, it will have to scale via use of algorithms and crowd-sourcing, and undoubtedly average quality, which to date has been great, will suffer. But there’s no turning back now. So, as is increasingly the case, we all have to learn how to process and boil down ever-increasing information. At least AngelList makes it super-easy.
The basic game of investing is the same, but tactics keep changing. AngelList is distributing information away from an exclusive “inside” crowd in much the same way that Bloomberg terminals revolutionized the institutional investing landscape by making the buy-side as informed as the sell-side. And that’s good for companies, and very good for folks like me in Vermont who don’t bump into startups every day the way you do in Palo Alto, Boston, Seattle, New York or Austin. I’m not sure where AngelList goes, but it continues to add value in different ways—not just the end of a seed round, but in B rounds, as a way to test pitches, etc. What I do know is that early stage investors who don’t spend time and master it don’t know what they are missing. I don’t know if my investment returns will go up because I study AngelList, but I know the odds of success have improved and I am a smarter investor.
Have you used it? Let me know what you think.
Filed under: Angel, AngelList, startup, Uncategorized | Tagged: 500 Hats, AngelList, AngelPad, Apricot Capital, Brad Feld, cardmunch, Charles Huang, dave mcclure, Dharmesh Shah, Facebook, GreenGoose, Jennifer Lum, LinkedIn, localmind, manu kumar, Mark Suster, mitch kapor, noisetoys, Peter Bordes, saygent, Thomas Korte, Twitter, UpNext, Venture Hacks | 16 Comments »