This is a transcript of a conversation I had with a friend who's a great product engineer and was curious what an angel investor is and how the relationship of a founder & an angel look like in its ideal state.
I have 17 really supportive angel investors in my current company and I've made 1 angel investment, and I know hundreds of founders who've raised and invested angel money, yet the topic is still not very well understood by a lot of new founders in Southeast Asia, so I thought I'd write my view.
What an angel investor isn't
An angel investor is not like the sort of person that would give you money for a restaurant or for a real estate that you want to build.
The people who do that usually the first thing they want to know is where the property or the land is, what it is gonna look like, when it is gonna be ready, what the foot traffic or the land value will be?
They want to know all those things upfront, so that they can quite accurately estimate how much money they can make within the next one or two years. And the primary, in fact the exclusive reason they invest in that real estate or restaurant is because it's so clear that they have an extremely high chance of making more money and they just wanna know everything upfront and you can't tell them that you’re not sure about the land or not sure what you will build or not sure what somebody is gonna sell in the property and so on. To a real estate investor, those are all turn-offs, they would just not give you money.
What an angel investor is
Now, an angel investor in tech is very different from these real estate investors.
The intent is quite similar, the intent is ultimately to make money. But the path to money looks very different. And I think, making a reference to Ken Honda’s book Happy Money, the emotion that comes with the money is also very different.
If I have some money that I'm willing to invest that I can afford to invest, and I can afford to lose…See that's the first thing, angel investment starts with the person being able to afford to lose that money.
In the context of a real estate investor, that's actually not the case. The real estate investor doesn't want to lose the money. It would be a terrible outcome if they lose the money. It's almost not acceptable.
Realistic risk and reward of angel investment
As an angel investor in tech , if you have 50K or 100K at some point that you can afford to invest, that you can afford to lose, you would wanna invest it in as many smart and ambitious founders that you know given the check size they accept.
If they say the minimum check size is 2K or 5K, 10K, you would just divide the 50-100k by as many founders as you can because most of them, no matter how hard they work, how good they are as founders or how great their product and everything is, most of them will sadly fail because startups are really hard and the chance of success is low.
But by choosing to invest in the best founders that you know, you're hoping to increase the chance of success from 1% to like 10% to 20% max.
You'll be an early investor in a lot of companies knowing that most of them will die. But if one or two of them succeed, they may succeed outrageously. And if you invested 2K and there's a 100X return, now, your 2K became 200K in a decade, maybe something like that or maybe in like two years or five years.
So angel investment in tech is, taking some amount of money that you can afford to lose, investing in companies that you believe in, building stuff that you believe in, knowing that you're buying time for the founders and their teams to create great products and companies and that if they succeed, you make money, they make money and their products will continue to serve their customers.
Can't spell angel investor without "angel"
It's very important to understand the above definitions and commit to them, so that if and when you ever get into the business of trying to raise angel investment, you can filter incoming angel investors by this definition, because there will be people who are the real estate investor types but wearing the mask of a tech angel investor and they try to gaslight founders and shame founders for asking for money before the founders have traction and results and so on.
Most of the time when you meet an investor like this, they do not mean bad, they just don't have a good understanding of tech as an asset class, and since founders can be goofy, for lack of a better word, investors may think the founder doesn't care about the investor's money. Whereas the reality is, startups have a drastically higher risk and lower certainty than real estate and similar asset classes, yet if and when they work, they produce returns that real estate and similar asset classes can't.
And no it's not gambling or luck in most cases, it is extremely intelligent value generation and value capturing and luck.
The whole tech industry is built on investment that came in before the founders had results because a lot of important products take time to build, to test, to get to a point where they can be financially viable and scalable. The teams that build and sell these products for months and years can't work for free full time. Angel investment is designed for that.
It's fair to the founders and the founding teams. It's fair to the investors. It's fair to the market, whether things work or whether they don't. It legally protects everyone so that if the company dies, founders can move on, having given their best. If the company works out, the investor gets a share of it with the team.
I think it's a pretty well-designed part of capitalism.
About the actual legal scheme
There's one that I've used that is very famous across the industry. Y Combinator made, it is called SAFE Note. SAFE stands for Simple Agreement for Future Equity.
What it means is it's a piece of paper like four or five pages. Previously, you would need to get lawyers, hundreds of pages and pay them a lot of money. They would literally put the name of the investor on your cap table and that’d actually cost a lot of money. If you fundraise now you still need to do that but you can postpone it to a bit later, maybe a later round.
So YC was like, we want to make a faster way so that founders can spend less time and no money on legal early on and fundraise faster and focus on their business.
So they made SAFE. And what it means is that let's say you give me 50K for a future valuation cap of, let's say, $2 million. Aand then there are a bunch of triggers for when your money will convert to actual equity, given that valuation. So 50,000 bucks divided by 2 mil is 2.5%, that's gonna be the future equity that you will own if my company raises seed funding at at least a $2 million valuation. But if I raise at a higher valuation, you still get equity based on the 2 mil valuation. So you get more shares compared to future investors because you came earlier. That's your reward.
The other scenarios in which SAFE will convert to shares is if the company gets acquired, if the company wants to shut down and it has some cash left.
So again, they would do the math, they would convert so that people get their shares. If a company is dying and it has some money left, it's very common for founders to return whatever's left. A prorated amount. or if there's nothing, then they wrap things up and let everyone know that they tried and it didn't work out, and these are the lessons they learned.
Relationship with angel investors
Companies who choose their angel investors carefully have a healthy relationship and peace of mind. You choose to send your angels monthly quarterly updates on how things are going, what the metrics are looking like, if you've launched, if you need anything
But other than that, they don't do anything with you unless you call them, and that works perfectly for both sides because the founder and the team are the experts who need to do the work. It’s not the angel’s job to code or do marketing and etc. They give founders the biggest gift = time = runway = money.
Great time to start a company if you can build and/or sell
I’m not saying it’s easy to raise angel investment. Like everything else, it has its rigour and difficulty, but it's a lot more accessible to anyone who can build or sell or do both than most people think. It’s accessible much earlier than what people think as well.
VC is completely different. It's a different dynamic, different incentives, different emotion that comes with the money, but angel investment is basically happy money if it comes from the right angel. (happy money is a reference to a book by Ken Honda. It means money that comes with the optimism and support of the owner, instead of with their sense of fear or guilt-tripping or anxiety).
My personal experience with making an angel investment
I made a 2-3k USD investment in a friend's company startup in Thailand called WeGoWhere early last year. It's essentially a way for people to manage their friendships and do stuff with their friends.
They have a lot of MAUs. It’s like how on Instagram people post what they have done. This team's idea is that on, their app people share the stuff that they are going to do so that you don't have FOMO and can just join them.
The founder is a friend of mine. Before this company, she had built a photo editing app that a few million people downloaded and used in Japan and Taiwan or somewhere. Before that, she did a lot of software and design gigs.
Consumer social is really hard, and it’s not every investor’s cup of tea in Southeast Asia. But as an angel investing a tiny check, I was like ”if anyone in this region succeeds at consumer social, I think it's gonna be them”. Right? And yeah, 2-3K for me is something that I can afford to lose that might end up becoming 200k in 7 years.
I think I'm a good angel investor because I let the founders do whatever they think they should do.
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