In order to make good investments, an angel investor needs access to great deal flow. In this article, we take a look into how an angel investor can increase both the quantity as well as the quality of the deal flow.
Quantity vs. Quality
Generally in life, choices between quality and quantity are mutually exclusive; you can only focus on one or the other. However, in the early stage investing quantity and quality go hand in hand quite often.
There is not a single source of deal flow that would constantly provide great cases. Even the best deal flow sources provide mediocre and even bad cases as well. Thus, the best way to access great deals is to ensure that the quantity of the deal flow is sufficient.
Deal Flow Sources
One can get deal flow from a number of sources. These include e.g. angel networks, startup events, crowdfunding platforms, accelerators, and direct connections.
Angel networks let startups access a group of angels through a single point of contact and facilitate the syndication and investment process of investors.
Quality and quantity of the deal flow through angel networks depends, on the one hand, the activity and visibility of the angel network (bringing in more deal flow to the network) and your own visibility and activity within the network (bringing more relevant cases of that deal flow to your desk). As a result, the best way to develop the quality of your deal flow through the angel networks you are a member of is to network with other members of the angel network and be active in the network.
When the other members in the network know you and what you can bring to the table, understand your investment strategy and most importantly trust you, they are more likely to invite you in good cases.
Many startups raise funding through startup events. For an investor, a problem with these events is that you are easily more likely to get quantity but not as much quality. But still, this deal flow does include some hidden unicorns looking to be picked up.
Often startups try to approach as many investors as possible during these events. Personally, I try to make it easier for the startups to see whether I am the right investor for them by including my investment focus into my introduction in the networking tool. This, at least to some extent, helps the startups to see whether their case fits my investment focus or not and hopefully gives me more relevant cases. In best case, the team selects me based on my investment focus and how I am prepared to help the startup; when this happens, there is a good possibility to be the first investor in a high potential case.
To be honest, most of the meeting requests I get in these events are nonsense, and I typically accept maybe in forty. More important are meetings that I request my self, preferably after going through a good deck of the company. (Pro-tip to founders: Always include a link to your deck or one-pager to your introduction.)
Crowdfunding platforms can also provide you with deal flow. Whereas most of the deal flow sources provide you with cases ranging from dismal to great, with crowdfunding platforms the cases and typically somewhere in the middle. You will not see the worst cases (depending on the vetting by the platform) nor the best cases (as these do not need to pay for fundraising). However, every now and then one can spot quality cases from the platforms as well.
The biggest advantage for the platforms is the easiness: Due diligence is done, terms are negotiated and the paperwork will be taken care of. Thus, I see the platforms more a solution for a less hands-on investor or an investor new to startup investing or as a diversification tool.
Accelerators can provide good deal flow as well. However, there are a lot of different quality accelerators in the market with different quality startups coming out. So do your due diligence before entering into a cooperation with any accelerator.
In my experience, you are more likely to get good deal flow from accelerators when you are linked to the startup with more of an advisory or mentoring approach than investor (sort of smart money vs. just money).
Direct connections include direct approaches from founders as well as referrals through trusted investors and other professionals. Direct connections are my favorite deal flow source. It is also the source that is most likely to provide me with great opportunities.
You are most likely to get in an early-stage startup if the founders know you and trust you. In other words if the founders know you and trust you, you are most likely to be the first investor they approach.
In order to get deal flow from direct connections, it is important that your connections know that you are an investor. And it is even better if they know what you can bring to the table (e.g. can you help them by leading the syndicate). So angel branding comes to play here again.
Above we have discussed some methods that an angel investor can use to enhance the quantity and the quality of the deal flow. At the end of the day, it all becomes down to the activity of the investor and the perceived quality of the investors. With the best startups the investors are not selecting the startup, the startups are selecting their investors.
Increasing quantity also brings more quality to the table. Seeing hundreds of cases give the investor an opportunity to reject 99% and invest only in the very top companies. This, of course, requires time and effort.
Finally, I would emphasize the advantage of branding yourself as an investor (see a separate article here). This will make you more visible in angel networks, get the right startups to look for you in the startup events and get the accelerations to reach out for you in right cases. But most importantly it increases the direct contacts from the right startups.