If You've Been Asked to Be an Angel Investor, Consider These 3 Tips
Free Book Preview: Coach ’Em Way Up
In the past year or so, I've sat down with dozens of CEOs and senior executives from enterprise cloud companies that have had successful exits, whether via IPO or acquisition.
My conversations with these folks have almost always included a similar topic: They tell me they are inundated with requests for funding and/or consultation from today's new wave of enterprise cloud startups, but they aren't exactly sure how to answer these requests.
Being an angel investor can be a gamble for sure, and sometimes that gamble can yield huge payoffs. When former Oracle executive Marc Benioff decided to venture off on his own in 1999 to realize his vision of an enterprise cloud company, he couldn't find any VCs to pony up for his fledgling, apartment-based startup. But, angel investors like Oracle co-founder Larry Ellison, Dropbox's Bobby Yazdani and CNET founder Halsey Minor took a chance, and Salesforce was born.
Obviously, not every angel investment is going to generate such amazing returns, and the executives I speak to usually have many of the same questions. Should they only say yes to people they already know? Should they gamble and put money into any and every promising startup? Should they say no to everyone?
It makes perfect sense that startups would want to connect with these proven cloud veterans. After all, with their experience they make ideal angel investors. But, do they even want to be angels? And, if so, what should their strategy be?
Here are three important tips for cloud veterans who are seriously considering angel investing.
1. Limit the number of investments.
A spray and pray approach to investing is always a bad idea. And it's especially bad for angel investors, who don't have the bandwidth to monitor dozens of different startup investments. The truth is that angel opportunities require a considerable amount of your time, resources and energy. And that's a lot to ask, especially if you're a cloud executive who's still running a company.
Many active cloud executives simply don't have enough time to be answering questions from startup founders and worrying about their investments while trying to juggle a demanding day job. So, only focus on a small number of startups that you truly believe in. For instance, look for cloud startups that are solving an important problem -- a problem large enough to justify an actual company, not just a product or feature. After all, it's quality not quantity that matters most.
2. Don't underestimate the capital requirements.
Angel investments in the cloud can be a risky proposition because new cloud companies tend to need more money than a typical angel round can provide. That doesn't stop the investments from being made, of course, but from my perspective, angel and seed round investors today are not providing the kind of financial support that enterprise cloud startups need.
According to a recent study by Pitchbook and Deloitte, the median seed round size in 2018 was about $2 million, but that's simply not enough. From what I've experienced, cloud startups really need $5 million to get to the next level.
Enterprise cloud companies need to hire highly qualified engineers that can design mission-critical solutions. Pair this with the high level of executive experience required to deliver world-class, enterprise-grade products, and you can see how the required funds to get a startup off the ground can quickly add up.
I've actually talked to a number of angel investors who have come to this same conclusion -- but only after it was too late. They realized after the fact that they didn't put enough capital in the seed round and, as a result, other investors came in and their positions were quickly diluted.
3. Seek out the right partners.
I've talked with numerous cloud executives who are interested in angel investing but aren't sure they have the time or energy to do the proper analysis on a startup or go through all the required meetings with the entrepreneurs.
That's where partnering with a venture firm makes good sense. Successful cloud executives tend to have great instincts, so most venture firms will be happy to do the due diligence and let you know what they think. If the venture firm does decide to move ahead with the investment, the angel investors get the benefit of more capital in the round, as well as the advantages of working with an institutional firm that can increase the chances of the company succeeding in the long run.
The value proposition for a venture firm is obvious. Not only do they get high-quality deal flow, they get to partner with the best minds and the best operators in the cloud market. If a proven cloud executive thinks an opportunity is interesting, there's a pretty good chance that it really does have potential.
It truly takes a village to build a great startup. Personally, I find that pairing a motivated, experienced angel investor with an emerging and promising cloud company can be the ultimate win-win. In fact, it can be heaven.