How to Create a Deal Flow

●     Finalize your investment thesis and areas you want to explore.

●     Reach out to accelerators.

●     Participate in and become part of angel groups.

●     Participate in local or remote demo days.

AngelList, Stonks, Republic—all of these are great platforms that give you access to various vetted startups. These platforms publicly market deals to accredited investors and disclose how much is being raised and at what terms.

• AngelList is a platform where fund managers or syndicate leads can create an LP audience and provide access to deals from their own network. It’s a very good place to get exposure to deal flow, invest, and participate in a few deals.

• Stonks works similarly, but here, various accelerators and startups pitch deals to angels. The biggest difference is you can reach out directly to founders to connect and bond rather than connecting through an intermediary. If your intention is to create a personal network, and you can invest time and resources, this is a good path.

• Republic allows people to invest in wide variety of startups across real estate, crypto, and video game. It is marketplace platform with $100 minimums and early-stage products willing to do mass market funding raising to achieve marketing objective as secondary goal.

Quality Deal Flow

Everyone is after quality deal flow. As you spend time, invest, and actively participate, you’ll most likely get connected to super angels, which are networks that will help give you more quality deals.

How do you know a deal you’re considering is a quality deal? Look for signals around quick growth, established angel participation, product traction, and maybe early-stage VCs backing the pre-seed/seed stage firms.

Social media sites like Twitter and LinkedIn are the best venues to follow top tier angels, investors and founders. There, you see their areas of interest, engage with them, and provide value. As you develop these connections, they’ll invite you to co-invest in their deals.

But if you want to avoid all the legwork, the best path to kick off your angel investing journey would be AngelList, Stonks, and Republic.

What Other Paths Do Angels Follow?

In the early days, you’ll be hustling for meetings, attending demo days, cold-emailing startup CEOs, and putting in tons of effort to build a personal brand—it feels like a never-ending process.

Build a Network

Building a network of communities and partners to access ecosystems in various geographies is an effective way to generate inbound deal flow. Being part of active founders’ and angels’ mailing lists, arranging meetups, and mapping follow-on investors to recommend startups that may be ready for the next round of funding are other things on which you should focus.

Build Your Process

Build a process you can follow and scale over a period of time:

• Join two demo days and one or two founder/angel meetups or product management meetups (just three to five meetings a month).

• Join pitch competitions as a judge or as an audience member to begin with.

• Partner with accelerators.

• Volunteer as mentor.

• Form partnerships to share deal flow.

• Host small, private networking events.

Create Content

Another way to kick-off your angel investor journey could be to create consistent, deep content on various startup topics. Options include:

• Blogging

• Writing (by invitation) on well-known newsletters

• Starting your own newsletter with a topic close to your heart

Track Activity

Super angels use focused methods and data-driven approaches. They track news, and monitor web activity and popular ecosystem events to track and identify new startups in their interest area. They also finalize specific criteria for companies in which they have interest by tracking them with Google alerts or setting LinkedIn sales navigator filters.

Attend Networking Events

Networking events are considered a slow process, but if you attend them consistently over a year, you’ll be surprised at the network you create. You can meet new people across demo days, accelerators, dinners, and speaking events. Whenever you meet promising people, reach out to them to set up a one-to-one meeting to get to know them more.

Leverage Social Media

Utilize social media to provide opinions and get to know more people online. Maybe produce short posts that are helpful to people in your area(s) of interest. Create value for founders before you invest by sharing insights, showing empathy around their pain points, and providing examples of how other founders have dealt with common product-building, fundraising, and recruiting problems.

Build a Network of Co-Investors

A group of likeminded people interested in the same areas leads to more deal flow. Before you lead any deals, you should initially find lead investors you can help to fill their round or commit to as a co-investor.

As you review deals consistently and learn about evaluation strategies from other experienced investors, you’ll form a muscle memory in terms of what you are seeking. However, it’s always a good strategy to write and record your investment thesis and update it regularly as your investing acumen matures. You can read about my investment thesis here: Angel Investing: How to Choose the Right Opportunity

Personal Choices

When starting out, you should keep investments broad-based, selecting the best ideas and founders across sectors while choosing a few deals in your area of expertise. For instance, you may have spent a decade in the advertising industry, but that doesn’t guarantee success when choosing the right advertising deal in which to invest. It may only give you a slight advantage. Similarly, simply reading about hot deals in a sector or hearing about them from another angel investor builds FOMO (fear of missing out), which isn’t a good investment strategy.

Stages

As an angel investor, you should also define the deal stages in which you want to participate. As a general rule, early stage deals have maximum risk and great returns. Usually, angel investors participate in pre-seed, seed, and series A stages, although some tend to invest in late or growth stages for a more stable 2X-5X outcome. My personal choice is 40% pre-seed, 30% seed, 20% series A, and 10% post series A.

Framework

Broadly speaking, you want to develop a basic investment thesis to quickly review an opportunity and decide whether to accept or decline it. Here, I’ll share a simple framework I follow. We’ll revisit this framework in detail again in a few months after analyzing some deals. Think of a framework as an outline and not something that sets boundaries on everything you do. Be flexible as you learn, and edit and update it as you go along.

Framework and Questions

Team/Founders

• Do they have domain experience?

• Why are they doing it?

• Any personal story or discovery?

• Technical/Generalist - Single or more than one?

• Repeat founders?

• Pedigree?

Market/Idea

• Total addressable market?

• Can this become a $100mm ARR (annual recurring revenue) in five years?

• Does the market have a trend behind the idea/AI currently?

• Competitive landscape – Intensity of Competition?

Product/MVP

• Patent?

• Unique insight?

• Is 10X better than what is present in the market?

• Can you evaluate the product?

• If a product launched, how sticky were the early customers?

• Any feedback?

• Can you interview customers?

Distribution

• Partnerships

• Channels

• Marketing return

• Sales teams/SDRs/BDRs

• Dependent or PLG?

Traction

• Initial traction

• What channels have been tested?

• Pilots, LOIs? Paid Customers?

Signals

• Hockey stick growth in any metrics?

• Are they able to attract a well-known advisor?

• Any big brand as a partner?

• A VC as a backer?

As an angel, if you’re reviewing a early stage deal, some of the above questions may not be relevant, so you may put more weight on team or idea/market areas.

In regard to analyzing team vs. market/trend, Andy Rachleff, co-founder and executive chairman of Wealthfront, says, “When a great team meets a lousy market, the market wins. When a lousy team meets a great market, the market wins. When a great team meets a great market, something special happens.”

Founders have an intense need to pick a good market; after all, they’re dedicating five to ten years of their lives to their startups. While VCs are diversified, founders have one shot! You’ll hear some success stories around a niche idea that grows outward into a huge new market, and another option is to choose a large multi-billion-dollar market to build vertically integrated solutions.

The above framework is enough to begin with if you’re not the first check because in addition to the above questions, you’ll have to do more vetting. Ideally, you want someone more seasoned who has done broad-sweep due diligence. You can go through a more detailed due-diligence checklist and do an in-depth analysis if you have time, but the current framework is for cases where a syndicate lead or more experienced angel investor is sharing a deal with you.

This time around, we didn’t go through in-depth analysis with the framework. You could create a 100-point checklist, but that’s not the intention here. In the majority of pitches, GPs/seasoned VCs evaluate deals based on a few mental models and broad questions. Your intention as an angel investor should be to do the same as you are exposed to more deal flows—leaving the in-depth analysis to syndicate leads or VCs that are participating in the deals. However, if you don’t have a known VC/syndicate in a deal that you’re evaluating, that will call for more in-depth due diligence. As a angel, though, at the end of the day you basically invest in the founder and market/idea.

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Stories abound about how folks who invested 5000 dollars in Google made 20 million or more. What people don’t understand is that these were not their one-off lottery ticket, but focused investments in some of the best minds that investors/angels in the founders' inner circle knew about very early.

A 20,000-dollar investment in the angel round would now be worth around 40 million dollars - CNBC https://www.cnbc.com/2014/06/06/uber-makes-early-investors-rich.html

Generally, people start investing due to their personal story/experience or after being attracted by these kinds of headlines. Whatever your path to enter the angel investing space, just know that everyone learns from their inevitable mistakes, and those who persevere get the chance to participate in wealth-building opportunities as well as help founders with their vision.

Is it Right for You?

First, you need to assess whether angel investment is the right space for you. Do you want to allocate a portion of your portfolio to angel investment? When done right, with a bit of luck, angel investment can lead to life-changing, generational wealth. But although you’re looking for a huge, positive outlier outcome, you should always be prepared (and able) to lose everything you allocate to this asset class in the event of an outlier negative outcome. If you can develop this mindset, have patience and invest accordingly, this may be a good avenue for you to pursue.

Time Frame

The waiting period for investments to mature is between five and 10 years, with some founders taking more than 10 years to have a liquidity event. However, in somewhat rare cases, the founder will receive a good acquisition offer and decide to sell early.

Allocation Percentage

Allocation percentage is the first step. I recommend a five- to 20-percent allocation based on your risk appetite. In the past, individuals were required to commit 25,000 dollars or more per investment, but now you can start with a one thousand dollar minimum directly with the founder (through AngelList RUV, which we’ll learn more about later) or a syndicate.

Frequency

A good practice is dipping your toes in with five to 10 investments a year and doing it consistently for five years until you have a portfolio of 25 to 50 firms. That way, you’ll have spread your investments across different themes and founders over time. As with anything, learning, practicing, and participating will expose you to a wide array of deals, frameworks and networks.

How Do You Start?

Unless you have the right connections, the passion and time to reach out to different founders at tech hubs, and the ability to pick the right deals, you’ll need to find someone who has been doing this kind of investing for years and has developed both the ability to choose sound investments and to build strong connections in the ecosystem. Learn about various syndicates on AngelList, reach out to leads with a good track record in areas where the thesis resonates with you, and be open to experiment with new, emerging leads.

Or, another path is if you have large checks of 25,000 dollars or more, you could become an LP for a fund and let Fund Lead take care of deal flow and due diligence and manage the investments’ life cycle.

Requirements

To be an angel investor, you must meet one (or both) of two criteria: financial and/or knowledge.

• Financial

  • You should be an accredited investor. To qualify, you must currently have made at least $200,000 in personal income (or $300,000 in combined income) over the past two years and expect the same or higher income in the current year.

  • People with a net worth of more than one million dollars singly or with their spouse, excluding the value of their home, also qualify.

• Knowledge

  • Learn and pass the Series 65 certification to get licensed.

  • Licensing enables you to angel invest and participate in AngelList syndicates.

In the following article, we’ll go through an investment framework.

Even the most experienced and knowledgeable people in the VC industry have struggled to choose the right opportunity and founders, and it won’t be any different for you. However, the greatest and most productive investors owe their success to their ability to stay humble, ask for help, learn from others, and co-invest to improve their odds. We’ll do the same here together!

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