The common theme throughout the sourcing section of the book revolves around networking, connecting with other angels, learning from them, and doing deals alongside other experience angels. In this post, I will approach the sourcing from both perspectives, the entrepreneur perspective, and the angel investors’ perspective.
For entrepreneurs, souring the startup capital in the “seeding” phase is one of the most critical stages of business. If we do not approach this phase with caution, however, we can end up not securing enough funds or asking for too much and not securing any venture capitalists or angel investors. The entrepreneurs should begin the seeding phase with a summary or a description of their business, executive summary, and a reasonable business plan (Feld & Mendelson 2011). Secondly, determine how much capital is needed by generating various financial models like the ones we are building in this class, such as a list of assumptions, income statements, uses of capital, and the balance sheet.
When thinking about angel investors, many new entrepreneurs would think about the wealthy investors that have lots of cash at their disposal. That is, in fact, one group of the angels. However, our friends and family members are also considered angels (Feld & Mendelson 2011). This approach could help source the upfront capital needed to present to the VCs and other angels during the meeting. If the project has no upfront capital and is depending solely on the VCs and angels to fund it from the ground up, it may become difficult to achieve. In any case, a thorough analysis of available options, as well as a complete financial model, should be a great start.
From the perspective of an angel investor, particularly the inexperienced investors just starting, the path to success is rather long and requires lots of time and commitment and involves a lot of risks. In the book, the Winning Angels, the authors present a long list of activities to guide the angel investors in becoming successful. Some of the strategies include networking activities, deal sharing with others, following the leader, and of course, investing.
Throughout the sourcing section, most of the emphasis is on networking activities. At the very start of the process, the angel should invest most of their time identifying the targeted investment type and writing a one-pager on the targeted investments. With the one-pager ready, the angel should be prepared to begin meeting with attorneys, bankers, accountants, and other professionals (Amis & Stevenson 2001). As the process progresses, the angel should join and participate in angel groups, join an angel/entrepreneur matchmaker program, focus on a particular industry, and make an investment alongside other angels. An important point to remember is taking a minority position for the time being and let someone else take the lead role (Amis & Stevenson 2001). All the strategies should generate a very decent pool of investment opportunities that have already been screened by the experienced angels and are ready for action.
Once the angel is ready to invest, they should proceed by co-investing with winning angels. The benefits of this strategy include a higher likelihood of success, a steep learning curve, introduction to other winners, and credibility by association (Amis & Stevenson 2001).
While searching for the winning investments, keep in mind that most of the deals may be failures, and that is perfectly fine. Learn to follow the leader, play nice with others by sharing your deals, and appreciate the referrals others give you. This process is a win-win for everyone and is highly encouraged and appreciated by other angels. Lastly, the angels should share the quality deals with others, not the ones they do not want. Angels flock and share – and for a good reason. If you let me have some of your cake, I’ll share some of mine (Amis & Stevenson 2001).
The next section will focus on the evaluation stage.
Amis, David, and Howard H. Stevenson. Winning Angels: the Seven Fundamentals of Early-Stage Investing. Financial Times Prentice Hall, 2001.
Feld, Brad, and Jason Mendelson. Venture Deals: Be Smarter than Your Lawyer and Venture Capitalist. John Wiley & Sons, 2011.