If You've Been Asked to Be an Angel Investor, Consider These 3 Tips

It makes perfect sense that startups would want to connect with business veterans. But, do you even want to be an angel? And, if so, what should your strategy be?

learn more about Matt Holleran

By Matt Holleran

Thomas Barwick | Getty Images

Opinions expressed by Entrepreneur contributors are their own.

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.

Related: What You Can Learn From This Angel Investor's 5 Rules of Investing

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?

Related: What Happened When This Angel Investor Committed to Investing Only in Companies With a Female Founder

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.

Related: Where to Meet Angel Investors and How to Pitch Them When You Do

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.

Matt Holleran

General Partner, Cloud Apps Capital Partners

As general partner of Cloud Apps Capital Partners, Matt Holleran works closely with entrepreneurs and executive teams to help them build global category leading companies. He has 12 years' experience in successful business app companies including Salesforce.com, and 12 years of VC and private equity experience.

Related Topics

Editor's Pick

Everyone Wants to Get Close to Their Favorite Artist. Here's the Technology Making It a Reality — But Better.
The Highest-Paid, Highest-Profile People in Every Field Know This Communication Strategy
After Early Rejection From Publishers, This Author Self-Published Her Book and Sold More Than 500,000 Copies. Here's How She Did It.
Having Trouble Speaking Up in Meetings? Try This Strategy.
He Names Brands for Amazon, Meta and Forever 21, and Says This Is the Big Blank Space in the Naming Game
Thought Leaders

The Collapse of Credit Suisse: A Cautionary Tale of Resistance to Hybrid Work

This cautionary tale serves as a reminder for business leaders to adapt to the changing world of work and prioritize their workforce's needs and preferences.

Business News

These Are the Most and Least Affordable Places to Retire in The U.S.

The Northeast and West Coast are the least affordable, while areas in the Mountain State region tend to be ideal for retirees on a budget.

Money & Finance

What Is a Good Credit Score and How Do I Get One?

Is bad credit holding you back? This article explains what constitutes a good credit score and how to raise your score if it's low.

Growing a Business

The No.1 Most Bankable Skill You Must Have to Succeed in 2023

If you don't foster this skill, you'll fall behind the pack financially and professionally in 2023.

Business News

I'm a Former Google Recruiter. Here's How to Land a Job in Tech — and What Can Blow Your Interview

A former Google recruiter says layoffs may be trendy, but tech workers are always needed. Here's how to land a job at a major tech company.

Starting a Business

5 Ways Entrepreneurship Can Help Teenagers Overcome Negative Peer Pressure

Here are some of the positives teenage entrepreneurship can have concerning peer pressure.