Introduction_To_Angel_Investing_Angel_101_(instructor)

INTRODUCTION TO ANGEL
INVESTING
Angel 101
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Angel Capital Association
World’s Largest Association of Active Accredited Investors
ABOUT US
Vision
ACA is recognized as the
trusted authority in angel
investing.
13,000+ Investors
250+ Organizations
Every US State and 5 Canadian Provinces
Individual Angels, Angel Groups,
Accredited Platforms, Family Offices
2
EVENTS
1 Host many international,

national and regional
events a year
Our
2 EDUCATION
Provide gold standard
education for angels
Mission
Fuel the success of

the accredited
3 PUBLIC POLICY
Leading voice for angels on
public policy lobbying in
Washington, DC
investor community
through advocacy,
education and
connection
building.
4 DATA & RESEARCH

Central resource for angel
investing data and research
3
Seraf’s Philosophy
We believe investors in early stage
companies should have access to
best practices and professional
tools to support the entrepreneurial
community worldwide and achieve
superior outcomes.
Insights and education, combined

with powerful portfolio
Welcome management tools allow investors

to understand their investing better,
Message
learn faster and make necessary
adjustments to select the highest
quality opportunities and drive
superior returns.
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About the Authors
Ham is Co-Founder of Seraf and the

Chairman of Launchpad Venture Group, a
Boston-based angel group. Through his
involvement with Launchpad, Ham has
built a personal portfolio of 50+ early
stage investments. In addition, he is a
board member or board observer with 5
early stage companies.
Christopher is Chair Emeritus of the Angel

Capital Association and Managing Director
of Launchpad Venture Group. He helps
manage Launchpad’s portfolio of 70+
companies, he has personally invested in
over 65 start-up companies, and is a
limited partner in four specialized angel
funds. Christopher is a board member,
advisor and mentor to numerous Seraf Co-Founders
start-ups, and a frequent panelist and Ham Lord & Christopher Mirabile
speaker on entrepreneurship and
angel-related topics.
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Presentation Overview
INTRODUCTION DEAL FLOW

1 Angel 101: Basic concepts of angel investing 5 Finding interesting companies
DUE DILIGENCE
2 GETTING STARTED
What is an angel and where do they invest? 6 Evaluating investment opportunities
ANGEL ROLES
3 PORTFOLIO THEORY
Building a successful angel portfolio 7 Investing human capital
INVESTMENT PROCESS APPENDIX

4 The steps from first meeting to investment 8 Tools, templates & resources
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INTRODUCTION
This course gives prospective investors a complete overview of key
elements of the fascinating and rewarding angel world:
● Time commitment
● Financial commitment
● Skills
● Risks
It’s important to understand what you are getting into or your

expectations might frustrate you
“Luck is a matter of preparation meeting opportunity.” - Seneca

“The more I practice, the luckier I get.” - Arnold Palmer
Read this first: A primer for new angel investors
Experience is what you get, when you don’t get what you want. Fifteen years ago, when I made my first
angel investment, I wish I knew then what I know today. As a newly minted angel in 2000, I assumed that
angel investing would be easy to jump into and become successful at. I was partially right… it was easy
to jump into. Unfortunately, it wasn’t that easy to become successful.
I’ve had my share of luck and good outcomes, but I also learned many painful lessons along the way.
Many of them would have been easy to avoid, had I understood a few key concepts. For this reason,
Seraf Co-Founder Christopher Mirabile and I are determined to help new angels learn from our mistakes
and the mistakes of others we have had the opportunity to observe from our perch at the center of a busy
angel ecosystem. The Angel 101 class is based on a course we teach at our angel group, Launchpad
Venture Group. We teach this course several times a year for new members of our group. It’s a great,
interactive two hour session with lots of Q&A from the audience. It’s a fun class to teach because
Christopher and I feed off each other’s energy, tell war stories, and try our best to keep the audience
engaged and entertained. What a great way to learn!
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Key Concepts in Angel 101
● What an angel is and where they invest
● Financial concepts used to build a successful angel portfolio
● The angel investing process from start to finish
● Where to find interesting investment opportunities
● Why it’s important to undertake due diligence before investing
● The importance of investing both financial and human capital
Read this first: A primer for new angel investors
Angel 101 is meant to be a course for angels just starting out. We designed the course to focus on
important topics, including:
● What an angel is and where they invest

● The angel investing process start to finish
● The basics of building an angel portfolio
● What kind of return can you expect on your investment
● The theory and practice of asset allocation for angel investing
● Where to fish for new angel investing opportunities
● Why it’s important to undertake due diligence before investing
● What are the risks that are inherent in early stage companies
● The importance of investing both financial and human capital
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INTRODUCTION TO ANGEL INVESTING
Getting Started
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How Does One Become an Angel?
Everyone has their own personal story of how they became an angel
Some common themes include:

● Helping a friend by investing time and money in her startup
● Networking or professional activities which lead to people with
interests in helping entrepreneurs or impact investing
● Hearing from an acquaintance how much he/she enjoys angel
investing and accepting an invitation to join his/her angel network
For experienced, successful, energetic people who want to give back,

many roads that lead to angel investing.
What Exactly is an Angel and Where Do They Invest?
When you ask angels how they got started, the answers fall into 3 groups: The first group say a friend
or associate approached them looking for an investment and they helped out. Once you help one
entrepreneur, your name tends to be shared and you are approached by other entrepreneurs. So
effectively this group started angel investing the “old school” way before they realized that’s what they
were doing.
The second group say that they got involved as a by-product of networking groups and activities or in
connection with causes. These angels might be impact oriented, for example, looking to support more
diverse groups of founders, or to make the investing world more diverse. They might have been solicited
to join a fund or group with a social impact element and are motivated as angels in part by the idea of
using their investment dollars to have a double bottom line impact.
The third group, which may be the biggest of the three groups, answer that a friend who was an active
angel investor told them (perhaps repeatedly) how much they enjoyed it and invited them to get involved
as well. In some cases, they join their friend’s angel group or network, and in other cases they might join
a fund run by the friend or an associate of the friend. Of course, there is no need to wait around for
someone to invite you. Most decent sized metro areas have a center of entrepreneurial activity or you
can check the list of member angel groups kept by the Angel Capital Association to see if there is an
organized group near you. As angel investing has grown and professionalized, there has been a growth
in the amount of organized coordinated angel activity and training and support for getting new angels up
to speed, so I would imagine more angels will be able to get faster starts in the coming decades than
ever before.
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What Companies Do Angels Invest In?
Short answer… all types of companies are possible candidates.
However, there is large focus on high risk / high potential businesses
The businesses with the potential to deliver 10X+ returns to investors
tend to have one or more of the following characteristics:
● Disruptive new technologies
● New fast-growing markets
● New disruptive business models
To overcome inertia of “familiar & good enough,” new products need to be

an order of magnitude better faster or cheaper. It is hard to do that without
tech.
The short answer is that angels invest in all types of companies, but the nature of some businesses
make them a better fit for the classic “risk capital investment” model typically associated with angels and
venture capitalists. That risk capital model is premised on the idea of building a portfolio of high risk/high
potential investments with the assumption that many will fail but a small number of big hits will generate
all the returns for the portfolio.
The types of companies typically associated with that sort of high potential are usually technology-centric
companies. The reason for this is not that tech-centric companies are necessarily better than other kinds
of companies, it is that the toughest competition most new products face is the inertia associated with the
“this is familiar, it’s good enough, devil-you-know” mindset. New products generally need to be
something on the order of 10X “better, faster or cheaper” to overcome this kind of inertia. That kind of
leap forward is tough to do with out some kind of technology-driven discontinuity. It is hard to make a
restaurant meal that is 10X better, faster or cheaper, but with high tech software or silicon, you can make
a 10X improvement in many consumer solutions or business tool and processes.
Note that not all angel deals are done with the “risk capital” mindset. Other deal structures such as
revenue based financing can allow angels to work with companies which are likely to grow a little slower.
For much more detail on what kinds of businesses angels prefer for their classic risk equity deals see:
“Like Moths to Light: Why Angel Investors Seek Certain Types of Companies” and “Oxygen, Aspirin or
Jewelry: Which Makes a Better Investment?” For a detailed discussion of the importance of capital
efficiency for angels, see: “Not My Cup of Tea - Some Business Types Are A Better Fit for Angels.”
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At What Stage Do Angels Invest?
$0 $500K $10M $100M $250M+
SEED STARTUP GROWTH LATE STAGE
Founders Venture Capital Venture Capital

Friends & Family Grants Venture Debt Private Equity
Venture Capital Bank Debt Public Markets
Grants Bank Debt Private Equity
Angels have finite financial capital combined with valuable human

capital, so they tend to focus on the earliest stages where they can make
a difference.

Angels invest at very early stages. They tend to make their initial investments in the “capital gap”
between the initial money provided by the founders and their friends and family on the one side and
larger institutional VCs on the other.
Friends and family round is typically going to be something like the first $50-100K to get the company off
the ground. At this stage the company has a couple founders and a reasonably well-thought-out plan, but
has not implemented much of the plan and has tested little to none of it.
The early angel round is likely to be in the $250K-$500K range. At this stage the company may well have
a rough “minimum viable product” and may have done some early testing with customers (unless it is a
life science customer in which case it is just going to have progressed the technology a bit more.)
A later more mainstream angel round is likely to be $500K to as much as $2.5M, and these typically
occur at the point where the company is starting to show a little bit of early traction. They may not have a
repeatable sales model yet, but they have a few customers and are beginning to suspect they know how
to sell it. This financing round is typically focused on funding a ramp up of sales and marketing
investment, in addition to a bit of team build out and maybe some key additional functionality to the
product.
While there might be one or even two additional angel rounds to help extend the runway and allow the
company to achieve “Series A” VC metrics, generally speaking from conclusion of one or two
mainstream angel rounds, larger institutional venture capital firms will likely supply additional capital.
Many angels will continue to co-invest in those later rounds. In fact, a majority of experienced angels
believe such “follow-on” investing is critical to their returns.
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Portfolio Theory
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How Much Should I Invest?
Consider angel investing as part of your overall asset allocation strategy
● Public Company Stock, Real Estate, Collectables, Commodities
● Hedge Funds, Private Equity, Venture Capital
Illiquid private company investments (e.g. Angel Investments, VC) should

represent a minority percent of your asset allocation
For the majority of angel investors who are not full time angel
professionals, a 5% to 10% allocation to angel investments is sufficient
and prudent
Don’t put more into angel investing than you can afford to lose.
How Successful Angel Investors Allocate Assets
There are major differences between angel investments and investments in traditional public company
stocks, mutual funds and ETFs. At a high level, angel investments have a lot of very serious drawbacks,
yet remain attractive overall, primarily because they have the potential to deliver outsized returns. When
you net it all out, angel investments are clearly not suited for every type of investor risk profile or portfolio,
but for some investors they are a critical part of the portfolio returns strategy as well as a vehicle for very
satisfying hands-on investing work.
When new angels ask me how much they should invest in this asset class, I typically respond with a
range of 5% to 10%. And, I tell them to include any investments they made in venture funds, PE funds or
angel funds in that total allocation. Based on my experience talking with hundreds of angels over the
years, I believe most active angels invest within this range. That said, I also know angels who invest
significantly more than this. In almost all of those cases, they are very high net worth individuals and
angel investing is their full time job.
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How Many Investments Should I Make?
All successful portfolios are either diversified or ridiculously lucky.

Diversification is a core feature of all professional angel portfolios
● Expect to make a minimum of 10 investments
● But, diversification begins, not ends, at 10 companies - 20+
investments will greatly increase your likelihood of a positive overall
return
A single 10X return will pay for 9 mistakes.
What’s the Magic Number?
The more investments you have, within the bounds of being able to manage them, the better. By manage
them, I mean keep on top of them (Seraf helps a lot with that), keep current with their messaging and
strategy, help them, have capital available to follow-on and be able to maintain a relationship with the
CEO. There is probably an outside limit on the number of companies one can do that with, but for a
full-time angel such as myself, who is passionate about the space, and energetic about putting in the
time, that limit is pretty high - probably in the neighborhood of 50 companies.
You might get a lot of nice little wins along the way, but the majority of your returns are going to come
from a tiny fraction of your investments. Massive wins are really rare, no matter who you are, and no
matter where you are. Given that you are relying on big, rare wins to power the bulk of your returns, it
stands to reason that you want to maximize your chance of hitting those. Being good at picking great
companies is important, helping your companies succeed is important, and following on in your early
breakouts is important, but at the end of the day, the most influential factor is having enough
mathematical chances to even be in a big winner at all. If you invest in 10 companies you have 5
companies that might be big. If you invest in 20 companies you are fishing out of a pond of 10. And so
on. So as far as I am concerned, baseline absolute minimum diversification starts at 10 investments, but
this is a case where more is definitely better (again, subject to your ability to manage them as noted
above.) Analysts have done Monte Carlo simulations that show that median returns increase
substantially with portfolio size. So, while your mileage may vary, it is pretty safe to say that 20
companies is better than 10 and 50 is better than 20.
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Are There Other Diversification Factors?
Diversification is more than quantity. Consider building a portfolio with

companies that are in different:
● Industries or sectors
● Stages of development
● Types of entrepreneurs
● Types of key risks
Invest in a few companies which allow you to be involved and leverage

your expertise, and invest in some where you can afford to be more
passive.
Macro-economic cycles vary, as do industry cycles - a large and diverse

portfolio will insulate you from business cycle swings.
Building a Startup Portfolio That Will Get You There
As you are putting together your portfolio, you are trying to make sure you are broad enough to have
balance. For every weight, you want a counter-weight. For example, you want to be in several different
industries, so that if one industry starts to slow down, others can help pick up the slack. Similarly, you are
looking to have some very early stage companies on longer timelines as well as some later stage
companies which can be expected to exit sooner and return capital to the portfolio in the near term.
Investing in different types of entrepreneurs is also important. You don’t want all late career
entrepreneurs any more than you want all millennials as company CEO. You don’t want all men or all
women. You don’t want all engineers or all marketing types. You don’t want people who are all from the
same social, educational or cultural background. You want to make sure you are investing in a mix of
people and that each one (or each total team) has appropriate skills for the opportunity at hand.
Different angel investments will require different amounts of your time and effort. Some deals are clearly
“projects” but you take them on because you have specific expertise that can really help. Other deals will
have someone else who is a better suited person in the lead position and therefore require minimal input
and supervision from you. The deals requiring lots of involvement can be lots of fun, but you obviously
cannot build a large portfolio full of high-effort deals. You will burn yourself out long before you reap any
financial returns. It is far better to invest in a mix of active and passive deals. A good way to think about it
is to look realistically at your schedule and when you are at your maximum capacity, do not take on
another “project” deal until one has exited or at least moved out of the diapers stage!
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How Do I Pace My Angel Investing?
Here is one example of the level of commitment it takes to build a

portfolio of 10 to 20 companies:
● 3 to 5 new investments per year for initial 4 years
● Follow-on investments equalling $1 for every $1 invested in each
company
● With $10K checks, you will invest between $30K and $100K per year
● Total amount invested will range between $200K and $400K
To the brand new angel looking to put $75K into their first deal, I say “how
about $10K into seven deals? You’ll thank me later...”
How Successful Angel Investors Allocate Assets
Here’s how I look at it. In a previous article, we asked how many investments an angel should make to
build a diversified portfolio. At the low end, we suggest that 10 is the minimum and 20 is better.
Furthermore, we suggest that a pace of 3 to 5 new investments per year is a good pace. And finally, we
recommend that an angel should reserve a dollar for every dollar invested in the first round.
So how does that translate into an annual capital commitment. Let’s make the following assumptions:
1. You invest in 3 new companies per year at $10,000 each

2. You invest an additional $10,000 in each company some time within 18 months of making
the first investment in that company
So that will work out to $30,000 in your first year and $50,000+ in subsequent years. For someone who is
investing $25,000 in each new company, the numbers look more like $75,000 in the first year and
$125,000+ in subsequent years. Not everyone believes in follow-on investing, so their capital
commitments will be lower on an annual basis. Without the follow-on rounds, an angel will cut their
capital commitment in half. As a side note, at Launchpad we highly recommend that new angels start out
investing at the $10,000 level. It’s better to get your feet wet by doing more deals and smaller
investments. We always cringe when a new member of our group writes a $50,000 check for their first
investment. We feel they are setting themselves up for an unsustainable investment pace and an
unavoidable case of buyer’s remorse.
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How Do I Evaluate Risk vs. Return?
In every asset class, you are looking to understand overall risk vs. return
Angel investing is properly classified as high risk, with the potential of

high returns
Your goal is to recognize opportunities with the potential to deliver excess

returns for the risks presented
One hint: experienced angel investors tend to prefer execution type risks
rather than more fundamental technical or “science” risks
Will you be a low conviction angel with a “spray and pray” approach, or a
high conviction angel with a more concentrated portfolio? Or somewhere
between?
As a very smart investor we work with, Bob Gervis, has correctly observed, investing is about evaluating
return and risk together, in context. As a general matter, asset classes may differ, but your investment
processes should stay the same. In every asset class you are looking to understand the overall risks and
expected returns for the class, so you can recognize opportunities with the potential to deliver excess
returns for the risks presented. Different investors will vary in how they tackle this challenge. Many angel
investors take the view that it is very hard at the earliest stages to really assess risks and as a result feel
they must adopt a “low conviction, low concentration” approach. In other words, they hedge risk by
making a large number of relatively low conviction bets and avoid having any one investment represent a
big concentration of their portfolio. At its most extreme, this approach is sometimes referred to derisively
as a “spray and pray” approach, but it should not be dismissed out of hand. Sometimes this approach
pays quite well because it increases the chances of hitting one big winner, and in angel investing, one
big winner can dwarf the impact of all your small winners put together.
Other investors prefer a much more analytical approach with more conviction in each investment and a
portfolio with fewer, more concentrated investments. The investment approach we use tends to fall
toward this end of the spectrum. To do this kind of approach well requires a lot of thought and a lot of
diligence. To determine if you are looking at a potentially investable opportunity you have to start by
considering traditional factors like: the management team, the market, quality of solution, whether there
is any kind of moat to hold competitors at bay, and what the exit potential might be. Then you need to
gauge the types and magnitudes of risks presented. Experienced investors will tell you they tend to
prefer “execution” type risks in fixable areas like go-to-market strategy, choice of vertical, or marketing
strategy rather than more fundamental risks such as technical or science risks.
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What’s an Appropriate Return Given the
Risks?
Angel investments are zero liquidity, long term, high risk investments.
Public blue chips may go down, but rarely go all the way to zero in a short
span of time. Plus, they allow you to sell on the way down.
Therefore, angel returns must be higher than liquid investments like

public stocks.
So, what should the return premium over public company stocks be?
● 5%, 10%, more?
To understand likely returns, you need to analyze the capital structure,

future capital requirements, and the exit potential for the company.
Once you understand what you are signing up for, you need to put it in context. What is an appropriate
return for the risks presented? Generally with zero liquidity, long term, high risk investments like angel
deals, the appropriate return will be much higher than the typical returns you could get in a fully liquid
investment class like blue chip stocks or mutual funds. To understand the likely returns, you need to
analyze the capital structure, future capital requirements, exit potential, and other factors in order to
determine the current valuation necessary to deliver minimum required return to compensate for risks
presented (or, the size of exit required to provide an adequate return at the indicated valuation). And
finally if the expected risk-adjusted return ratio looks attractive, then two final tests are necessary:
● Deal particulars - are there any things about the deal that are off? Is the board solid? Is there
good governance? Are there any red flags in the investing syndicate?
● Follow-on options - will this deal allow you to “stage” capital by making additional, much
larger, much smarter bets over time? If not, is it worth the trouble and risk to make just this
one investment?
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Source of Upside Potential? Early Rounds.
The basic edge of angels
● Time, patience, energy and skill
● Ability to get involved in very early rounds
● Invest in young companies with lower valuations
And then to follow those early investments with smart money: growth
consumes cash; companies tend to raise more than once
● Seed rounds are the earliest independent money
● Mainstream angel rounds are typically $250K-$2.5M
● Later rounds may be Angel, VC or both
If things are going well, later rounds are merely arithmetically dilutive; if
things are going poorly, they are economically AND arithmetically dilutive.
What is the difference between seed stage, early stage and angel stage?
It is true that the terminology does get confusing, stemming from the fact in regular usage the definitions
are sufficiently imprecise so the meanings can actually overlap..
● Early stage is the broadest term and is really a superset which can be used to describe all of
the various stages of young startup finance.
● Seed stage has typically been used to describe the absolute earliest rounds - friends and family
and early angel rounds.
● Angel stage has been used to describe companies which are a bit more organized and have
accomplished a bit more of their plan than at the seed stage.
Many angels and sometimes even VCs will invest at the seed stage. To my way of thinking it is more of
difference in mindset than a difference in stage. I would argue that seed stage investors are just regular
angels or VCs who like to go in very early. I would further observe that what generally seems to be the
case when these investors go in early is that they have some kind of special affinity to the company.
They might have an affinity to the founding team because they have worked with them before or invested
in them before. Or, they might have an affinity to the technology or solution because that is their area of
special expertise. They might go in early because they have an affinity for the market - perhaps it is the
market space that they have spent their entire career working in.
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Should I Invest in Earliest Early Seed Round?
Early seed rounds are hard to price and typically deliberately overvalue
the company in order to make the “founder economics” work.
● Risk/Reward ratio is often better in the later rounds
● But, by making an initial investment, you gain the option to invest in
future rounds
● With the hottest opportunities, if you did not invest in the seed
round, you may not be able to get in at all.
The price of admission in the hottest deals is often the small check you
wrote in the early seed round.
Angel Follow-on Theory
Early seed rounds are very hard to price. The company isn’t worth much because they are still early in
their product development and usually have minimal revenue. So investors and entrepreneurs come up
with a valuation that works for both, but that valuation is usually well above what the company is truly
worth - as Christopher likes to joke: how much should you pay for two engineers, a powerpoint and a
dog? As the company matures and raises additional rounds, valuations tend to approach reality. So
these rounds are actually a better deal since the risk/reward ratio improves for the investor. And,
because more time has passed, you are closer to exit, so even if your return multiple is lower due to the
higher valuation, your IRR is higher because the money was not tied up as long.
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Tracking Angel Investing Returns
Angel Investing returns are more challenging to track than public

markets.
There have been multiple research efforts based on limited data
● Largest and most formal report (2007) by Wiltbank and Boeker using
3,097 investments from 538 angels… Shows a 27% annual rate of
return
More research and data is needed to better understand angel returns. The
ACA Data Analytics Project is focused on this research.
Angel Investing Returns: Research and Reality
In terms of average returns, the largest and most widely-cited study was done in 2007 by Robert
Wiltbank and Warren Boeker with funds from the Ewing Marion Kauffman Foundation. That study looked
at the returns of 3,097 investments by 538 angels and included data on 1,137 exits and closures. The
findings of that study were that the average return was 2.6 times the investment in 3.5 years, or an IRR
of 27%. According to an excellent survey of other returns studies done by a group called Right Side
Capital Management, the returns findings of most other studies tend to cluster around this IRR, save for
one low outlier at 18% and one high outlier at 37%.
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Best Returns Correlated with Work, Process
Wiltbank / Boeker study indicates that angel returns are better when
angels:
● Put in 20-40 hours of diligence
● Had expertise or access to expertise
● Interacted with portfolio companies with coaching, connections, etc.
A risky, illiquid and labor-intensive asset class had better offer superior
returns!
Angel Investing Returns: Research and Reality
Aside from returns, the Wiltbank/Boeker study had three very key findings: (1) angels who put in more
due diligence time(20-40 total person hours per deal) had better returns (2) angels who had expertise or
access to expertise in their investing areas had better returns and (3) angels who interacted with their
portfolio companies at least a couple times a month with mentoring, coaching, providing leads and
monitoring performance had better returns.
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Distribution of Company Exits - Multiples
By % of financings in companies going out-of-business, acquired, or IPO

64.8
2004-2013
n = 21,640 financings
25.3
Includes data from Dow Jones VentureSource and

Chart from Correlation Ventures
other sources
Less than 1 out of 20 venture-backed companies turns into a home run.
The Mix of a Winning Startup Portfolio
If you are using a good process and working out of a strong deal flow, you can expect to end up with
approximately 5 strikeouts, 4 base hits and 1 home run in any batch of ten companies. For a more
detailed analysis, Correlation Ventures researched more than 21,000 exits of VC-backed companies
between 2004 and 2013. Based on the data from Correlation Ventures, you can see in the chart above
that approximately 65% of companies return 0 to 1 times the capital invested. Those are your strikeouts.
Another 25% of companies return 1 to 5 times the capital invested. Those are your base hits. The
remaining 10% return more than 5 times the capital invested. And, that’s where your home runs come
from. If you are really lucky, over the course of a few 10 company “baskets” you have one of the 50x+
returns that qualify as a grand slam.
It’s important to note that these results are for VC-backed companies. Angel investors fund a wider range
of companies, and in many cases, invest at earlier stages, with lower valuations and higher alpha, than
VCs with correspondingly higher valuations at their initial time of investment. Based on the data that we
have collected at Seraf over the years, we see a somewhat lower percentage of failures in our dataset
and a slightly larger number of home runs versus what Correlation Ventures reports for the VC industry.
Though, in fairness, the Seraf portfolio management platform may cater to the more organized, serious
and professional half of the angel market.
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Distribution of Company Exits - Dollars
CB Insights
Analysis of 3,358 tech company exits in 2016
97% Exited through acquisition

3% Exited through IPO
These exits include only VC exits. There are many more exits of angel backed
companies in the sub $50M range.
Startup Pathways to Success
There are many great sources of data from the technology investment world, including Investment Banks
(e.g. Goldman Sachs, JP Morgan), Accounting Firms (e.g. PwC Moneytree) and Research Firms (e.g.
CB Insights, Pitchbook, Crunchbase). If you are the type of investor who likes to dig into data, I
encourage you to go online and access the reports from these organizations. Many of these firms have
blogs and newsletters that you can subscribe to in order to stay on top of industry financial trends. One of
the more comprehensive research organizations for tracking technology company exits is CB Insights.
As of this writing, the most recent report on exits was their 2016 Global Tech Exits Report. This report
analyzes the results from 3,358 exits in 2016. Out of this cohort of companies, 97% exited through an
acquisition and 3% made it all the way to an IPO.
As you can see from this breakdown shown in the chart above, 80% of the positive exits they tracked are
for less than $200M. For investors looking to achieve a 10x return, the company has to raise quite a bit
less than $20M in equity over its financing history. Please note that this report from CB Insights does not
cover all exits that happened in 2016. In fact, it is probably overly rosy in its outlook. It’s impossible to
track every deal that occurs throughout the year, largely due to the lack of publicity and small transaction
size for many deals. Smaller deals are far more likely to go untracked. If you were to factor in these
transactions, the percentage of exits that are less than $50M in size would likely be much larger than the
54% indicated by the CB Insights report.
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Building a Successful Angel Portfolio
If you build a portfolio of 20 companies, what can you expect?
If you don’t perform due diligence and add human capital to support your
investments, you limit your likelihood of achieving these results.
Angel Investing Exits: Base Hits to Home Runs
Assuming you are an angel investor who puts time and effort into building your 10 company portfolio by
performing due diligence and adding human capital to support your investments, you should have the
following expectations. A rough estimate for your portfolio will include 5 failed companies, 4 base hits and
1 home run. Let’s break this down a bit further and understand what this will mean for your returns. With
the 5 failures, you can expect little if any capital returned. You will have some tax benefits on the losses,
but they will add up to around 20-30% of your original investment
Base hits describe exits anywhere from 1x to 10x of your original investment. As we discussed in a
previous question, quick exits will result in a 1.5x to 3x return of capital and the other exits should cluster
in the 3x to 8x range. Your portfolio’s 1 home run should be somewhere greater than a 10x return.
Assuming you allocated the same amount of capital to all 10 companies, this company will return all the
capital that you invested in the original 10 companies. Think of this exit as ‘returning your fund’. But, how
you do overall is now driven by how your base hits do. A couple of 5x returns and a couple of 3x returns
will help you generate overall fund returns of at least 2.5x your original capital.
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Example: One Path to Top Quintile 3X Return
There are many paths to a 3X return
Here’s one example where we invest the same amount ($10,000) in each
of 10 companies:
● 5 companies fail and return $10,000 in total
● 3 companies are small exits and return $90,000 (~$30,000 each)
● 1 company is a medium exit and returns $50,000
● 1 company is a home run and returns $150,000
If you add up the returns, it equals $300,000 for your $100,000 invested.
Your IRR will depend on how fast it all happens.
Without one 10X+ home run in your portfolio, it’s extremely difficult to
achieve a 3X return.
The Mix of a Winning Startup Portfolio
How can an angel end up making 3 times her money in ten years? Without the aid of smart follow-on
investments, it is not easy. Using the expected distribution of exits that we see from the Correlation
Ventures chart, we come up with the following for a top quintile (3X DPI) angel portfolio.
● 5 companies in the portfolio are total losses and return $0 to the investor. However, you are
able to get 20% of your investment back through an offset vs. any capital gains you have.
This means each company will return $5K in tax writeoffs for a total of $25K.
● You might not like the fact that I used tax benefits as part of the investment returns. So
instead, consider that at least one or two of these failed companies will return some capital.
That’s another way you can get $25K back from your initial $125K investment in these 5
companies and still consider the investments in the strikeout category.
● 3 of the remaining 5 companies average out to 3X on invested capital, so each company
returns on average $75K for a total of $225K. Combined with the 25K from the losers you are
now at a break-even $250K or 1X.
● 1 company produces a 5X return, not a bad exit, but nothing to set the world on fire. This
company returns $125K.
● 1 company is the real winner in the portfolio (15X) and does the heavy lifting you need to
achieve a high rate of return. Without this exit, it’s hard to justify the risk that an angel
investor takes with their capital. This company returns $375K.
● So the combined return on all 10 companies is $750K. That’s a 3X return on the angel
investor’s original investment of $250K.
Many angel investors believe they have to invest in the next billion dollar company to achieve big returns
on their angel investments. The reality, based on the assumptions outlined above, is that you don’t. In my
personal portfolio, I’ve had two home run exits (i.e. 10-20X level). One company was acquired for less
than $50M and the other for less than $200M.
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Investment Process
28
Elements of an Angel Investment Process
FIND SCREEN PITCH DILIGENCE
CLOSE DOCUMENT SYNDICATE NEGOTIATE
Most startups fail, and they take a lot of investment dollars with them. It
takes a solid process to build good deals with a superior chance of return.
How the Angel Investing Process Works from First Meeting to Final Close
New angels, new entrepreneurs and people outside of the startup ecosystem may have a general sense
of how early stage investments happen, but, if put on the spot and asked to describe the exact process,
most would be hard-pressed to come up with much detail at all. Like cooking, changing a tire, playing a
sport well, and so many other things in life, the angel process is simple in theory, but a bit more
complicated in practice. The angel process is not rocket science, but there are a lot of steps, there is
some complexity, and there can definitely be some science to doing some of the steps well.
Not every angel deal process is identical across different regions and types of angels, but they have
many common elements. By understanding the elements, you can appreciate better the role angels play
in helping startup companies get off the ground, and the many ways in which angels need to interact with
their community, with companies and with each other to get their deals done.
29
1) Finding Great Companies
Getting access to great companies requires building a network of:

● Entrepreneurs who recommend you to their peers
● Investors looking for syndication partners
● Other angels in your group, fund or network active in the community
● Service providers such as lawyers and accountants
Reputation and referrals are the linchpins of superior deal flow for angels.
Most angels start out having to work to build up access to interesting companies (i.e. deal flow.) It can
take time to know where in their local ecosystem to look and time to build a reputation as an investor
founders want to work with. But once an angel is more experienced and better known, or once they
become part of an established group or fund, the companies tend to find them. Reputation and referrals
tend to bring deals in. Important referral sources include:
● Entrepreneurs you have backed who recommend you to their peers,

● Investors looking for syndication partners or looking to help an interesting deal that is not a fit
for them
● Other angels in your group, fund or network who are active in their community mentoring,
advising, judging business plan competitions, teaching and speaking
● Professionals and service advisors such as lawyers and accountants.
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2) Screening
Screening is the process of filtering potential wheat from the chaff

It’s a process to help focus your time on companies which:
● Fit with your investment focus areas
● Have true upside potential
● No obvious red flags or show-stoppers
● Relatively attractive compared to other companies in your funnel
There are more interesting companies than you can spend time on. Your
goal should be to spend less time on more deals, and more time on fewer
deals.
All angels go through some kind of screening process to separate the companies they do want to work
with from the ones they don’t. Some solo angels may have firm criteria or a checklist they follow, but
many will be relatively informal and follow their gut about which companies to follow up on. Angels in a
group, network or fund will typically put the deal through some kind of scouting or screening process to
check it to weigh:
● Fit with their investment focus areas

● Upside potential
● The absence of red flags or show-stoppers, and
● Relative attractiveness compared to other options vying for time, money and attention.
This process might be referred to as “scouting,” or “screening” or a “screening committee” or a “deal flow
committee,” but regardless of what it is called, it serves as the first filter for separating the potential wheat
from the chaff.
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3) Pitching
Pitching evolved because it is a very efficient way to reach a wide variety

of angel investor types
● Audience ranges from a few solo investors up to a large angel group
● Entrepreneur delivers a 10-15 minute presentation followed by Q&A
● Main purpose of the pitch is to “set the hook” so investors will move
to the next step in the process
A best practice for all investors is to be decisive and transparent with a

go/no-go decision shortly after the pitch.
Unlike VC investing where a relatively small team controls the decision-making for a large pot of money,
the angel decision-making is very distributed. In effect, a consensus needs to be built. To make any kind
of decision, most angels need to spend time with a team to hear their story and interact with them live.
Experience teaches that the only way to do that kind of thing efficiently is to have the team “pitch” their
opportunity to groups of investors. It might be an informal pitch in a coffee shop to a couple of solo
investors, or it might be a more formal and organized pitch as part of a regular forum set aside for startup
pitching. For example, most angel networks hold a monthly or quarterly meeting where promising
startups efficiently pitch many angels at once, typically using a formal slide presentation on a screen.
These pitches are typically followed by some Q&A. Pitches like this can be stressful for entrepreneurs
and their teams because they are usually time-limited. It is difficult to be in front of a large audience, let
alone deliver a complete yet compelling synopsis of a lot of detailed information. But they are
time-efficient compared to the gallons of coffee an entrepreneur would have to drink for an equivalent
number of 1:1 meetings. The best groups will add further efficiency by being decisive and transparent in
their go/no-go decision, as well as generous with feedback and advice after the pitch.
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4) Due Diligence
Some angels might invest after just a pitch, but…
Most investors will undertake some level of due diligence,
Main purpose of diligence is to spot the easily avoidable mistakes and
Document and check the key assumptions you are making.
Human nature is quick to grasp how things could go well, but slower to
appreciate the more subtle ways in which things could go wrong.
Some angels might invest after just a pitch, but most undertake at least a modicum, if not actually a
significant amount, of due diligence review first. Although it takes different forms, the diligence process is
really about asking questions and trying to verify the key assumptions and spot the easily avoidable
mistakes. As it progresses, diligence may involve some modeling and scenario building. For solo angels
diligence might consist of a couple more sit downs with the team and a bit of research or reference
checking. For networked groups it might be a more formal team effort focused on digging into a longer
checklist of issues and preparing a formal due diligence report which can be used by peers and
syndication partners.
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5) Negotiating
Some level of negotiation typically begins before diligence is complete
Key deal terms are discussed to make sure both sides are in same
ballpark
● Deal Structure - preferred stock vs. convertible note
● Valuation - what is the company worth today?
● Governance - what will the board look like?
Once completed, negotiations should result in a mutually acceptable

termsheet which can be shared with the final diligence report
Negotiation is mostly entrepreneur education about key risks followed by

agreement about how to allocate them.
Actually, the next step begins before the end of the diligence process. If the diligence is going well, the
angel or angel group manager leading the deal will begin to talk to the entrepreneurs about prospective
deal terms. (There also might be a sanity check before diligence even starts to make sure people are in
the same ballpark.) It is at this point issues like deal structure, valuation and deal terms are discussed,
with the goal being to negotiate a mutually acceptable set of terms and document them in a termsheet
which can be shared with the diligence report when it is complete.
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6) Deal Syndication
The lead investor will work with the entrepreneur to:

● Get a sense for how much investor interest is currently engaged
● How much additional money needs to be found
● Find other investors needed to fill up the remainder of the round
A great deal lead puts together a market acceptable set of terms that
allows a group of like-minded investors to come into alignment around a
deal.
So while you are finishing diligence and talking about termsheet issues, you are also trying to get a
sense of how much investor interest is currently engaged, and how much additional money needs to be
found. This is the beginning of the process typically referred to as deal syndication. The goal of the
entrepreneur and the lead investor is to bring desirable investors in as quickly as possible. Naturally
there is some tension between fast and desirable, because you cannot hold up your closing forever
waiting for preferred investors when there is money being offered by perfectly acceptable investors. By
preferred and acceptable, I am talking about more than just reputation and whether they are nice people.
The key issues are alignment amongst investors and alignment between investors and the management
team, and value-add in terms of expertise and connections. It is obviously also necessary to find
investors who will accept the terms as negotiated; if every investor wanted to renegotiate the terms of the
deal, chaos would ensue and the deal would never get done.
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7) Deal Documents
Before checks are written:

● Definitive legal documents are prepared based on “instructions”
embodied in the termsheet
● Typically a 2 to 4 week timeline for drafting and negotiating legal
docs
The termsheet giveth but the deal documents taketh away (or at least
narrow)… Deal documents are the definitive contracts you agree to - read
them. Get help if you have questions, but don’t rely on the termsheet.
Before any checks can be written, the definitive legal documents need to be written up, and a closing
needs to be prepared. Termsheets typically contain a clause specifying whether company counsel or
investor counsel will take the pen on the first drafts. Regardless of who is in the lead, someone has to do
it, and they use the termsheet as the instructions for how to draw up the documents.
In theory this means the process is simple and straightforward since all the big issues are already
decided and memorialized in the termsheet, but in practice this stage is actually a field of sticky wickets.
A termsheet is a 3-5 page document formatted with big margins. The definitive legal documents in a
priced equity round are reams of pages of paper. There are many concepts in a termsheet that are open
to interpretation or require additional detail to be supplied as part of the document implementation.
As a result, there are plenty of opportunities for the non-drafting party to disagree with, and want to make
changes to, the first draft of the documents. Usually counsel experienced with these kinds of deals are
involved and since they are familiar with market norms and standards, the first draft is not too far off the
mark. But even if it is, the fees of both sets of lawyers are typically capped in these early stage deals, so
they don’t have a big incentive to fight just for the sake of fighting. So deal documents can usually be
pulled together fairly quickly. Typical might be a week to draft, a week to negotiate and a week to finalize.
A fast process might be half that time.
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8) Closing
The company and the lead investor set a closing date and process
Key elements to this step include a set of clearly written closing

instructions related to signing documents and sending funds
Creating a good closing package is somewhat of an art. Done well it can be

orderly and efficient. Done poorly it can lead to frustrations, mistakes, and
deal delays.
A closing date and process is outlined, and the definitive documents are sent to all the investors who
have soft-circled (committed money to the deal by indicating they intend to invest). The documents are
accompanied by instructions for returning signatures, mailing checks or wiring funds. Creating a good
closing package is somewhat of an art - done well it can be orderly and efficient; done poorly it can lead
to frustrations, mistakes, and delays. But from the investor’s perspective on the receiving end, it is
tedious desk work, and definitely not the most fun part of angel investing. When you have a lot of
companies in your portfolio, there is a lot of this kind of desk work, and productivity and organizational
hacks are essential.
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The Critical Final Stage - Post Investment
But wait… you are not done just yet!
Once you are an investor, you have every incentive to help in any way you
can
● Mentoring
● Introductions
● Board service
Unlike with public companies, data and experience teaches that helping
your angel companies can have a significant effect on your returns.
Once you are an investor, you have every incentive to help in any way you can with board advice,
mentoring, introductions, and possibly board service. If you are invested in blue chip stocks, you
probably couldn’t help your companies much even if you were allowed. But with thinly capitalized and
thinly staffed startups, many time run by young first time entrepreneurs, there are tons of ways you can
help, and the collective help of the angels can have a huge positive effect on outcomes.
Not long after you go through this process with a company, they are going to need to raise another round
of funding. This will be the case whether they are successful or not. Growth does not produce cash, it
consumes cash. So not that many months after you write your first check it is lather, rinse, repeat. You
are going to need to do the analysis to figure out whether this is one of the investments which merits
follow-on money from you. Unfortunately, it is more work - essentially the same steps outlined above, but
from the diligence stage forward. Fortunately, it may be a great opportunity to double down on one of
your winners with some smart money and significantly boost your overall returns.
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Deal Flow
39
How Do You Find a Fishing Guide?
Wherever you live, there should be a nucleus of an entrepreneurial

community
Networking to find experienced angels will help forge early connections
National organizations (e.g. ACA, NACO, HBAN, EBAN) are key resources
To catch a fish you need to know where to look. Great guides can take you to
the best fishing holes.
Are You Fishing in the Right Pond?
Unfortunately, great deals don’t magically appear at your doorstep all wrapped up with a pretty bow. It
takes time and energy on your part to find these deals.
For first time angel investors, understanding where to find deals, how to perform due diligence, how to
negotiate an investment and how to support the company can be a bit overwhelming. So working initially
with experienced angels on your early investments is critical to your success. Just as a fishing guide will
take you to where the fish are biting, experienced angels will help you navigate the startup world.
In terms of finding a starting point, regardless of where you live, there should be a nucleus of an
entrepreneurial community somewhere in your area or region. Experienced angels can help you meet
people and get involved, so networking to find people who are active in the angel space is a great place
to start. If you are in a place like Silicon Valley or Boston, the entrepreneurship nucleus dominates your
region. Regions such as this with strong entrepreneurial communities have tons of resources to educate
and support angel investors.
Other regions, less so, but one particularly powerful shortcut is to join an existing group or network of
angels already active in your community. Do some diligence and ask around about reputations to find a
group held in high regard by entrepreneurs. Don’t take the group’s word for it, get some independent
verification. Organizations such as the Angel Capital Association are great resources to connect with,
and they maintain a directory of member groups organized by region.
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Where Are the Best Fishing Holes?
Best spots are most commonly found in locations with strong

entrepreneurial communities
● Universities with business schools or robust entrepreneurship
programs
● Incubators and Accelerators
● Regional Meetups
● Co-Working Spaces
Entrepreneurship communities are like hives that feed and support

themselves. Find the centers of activity so you can find the fastest moving
opportunities.
It’s no surprise that many of the best fishing holes commonly pop up in areas with strong entrepreneurial
communities. Communities with critical mass of entrepreneurs tend to foster continued entrepreneurial
success by having more support systems, potential founders and employees, experienced investors and
advisors. Yet, over the past decade or two, numerous universities and cities not as well known for
entrepreneurship have started to develop strong local entrepreneurial centers. Investors such as Brad
Feld have been beating the startup drum and creating playbooks like Startup Communities, to help other
regions around the world build their own entrepreneurial centers.In larger cities you will find excellent
fishing in a variety of places including:
1. Universities with business schools or robust entrepreneurship or science programs

2. Incubators & Accelerators (both national networks such as TechStars as well as local efforts,
vertically specialized programs and corporate incubation programs)
3. Regional Meetups focused on startup community as well as things like business plan
competitions
4. Co-Working Spaces (from big international chains like WeWork and ImpactHub, to more local
city wide systems such as the Cambridge Innovation Center or WorkBar, etc.)
If you can’t find any organizations or events in your region that are similar to the above list, you are
probably fishing in a dry hole. It’s time to pack up your kit and head to another nearby location (at least
for your angel investing). Depending on where you live, you shouldn’t have to go far to find some
interesting activity. I am personally aware of organized angel activity in all 50 US states, including remote
places like Idaho and Montana as well as Maine in the other direction. Many successful investors travel a
couple times a month to participate in an angel network or other start-up activities in a nearby hotspot. If
traveling (or moving) from your current location is not on your list of to-dos, then you may want to
participate in a well-regarded angel fund in a city with great deal flow.
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Do You Know What You Are Fishing For?
This is a critical question that all angels need to ask and answer
Active angels should develop two key checklists

● Will Invest: What you look for in a company and a deal
● Won’t Invest: What are the “showstoppers” where you say “no”
There is nothing entrepreneurs despise more than a tire-kicking angel who

takes up a ton of their time but never invests.
As you get up the learning curve it is very important to develop a sense of what kinds of deals you will
and won’t do and to be decisive about it. There is nothing entrepreneurs despise more than a tire-kicking
angel who takes up a ton of their time but never invests. Developing a reputation like that as you make
your way into your entrepreneurial community is a death knell. You do not need to be the smartest angel
in the room or the angel with the biggest checkbook or the most marquee name, but you MUST be the
angel who respects the time of the busy entrepreneur and either fishes or cuts bait decisively. As you
learn what you are doing, you should develop two key checklists and keep them in your mind. One
checklist should be things you insist on in a deal, and the other should be a list of “showstoppers” which
will always keep you from investing in a company.
Each angel’s pair of lists might be different depending on their experience, their risk tolerance and their
interests. An angel might have industries they will invest in such as software or medical devices and
industries they won’t, such as gambling, or consumer packaged goods. And she might have certain deal
terms she will and won’t do, certain risks she is or isn’t unwilling to undertake. However you synthesize
your experience and professional angel learning, you need to have your “must have” and “cannot have”
lists and you need to stick with them and respect entrepreneurs’ time by being decisive. I cannot put it
better than my friend and mentor John Huston who has observed that “one way to spend less time on
more deals, and more time on fewer deals is to have a showstopper screen facilitating swift and
consistent rejections - I’ve never lost money on a deal I ducked because it was outside my envelope.”
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Angel Funds
Angel Funds are another approach to angel investing.

● Managers oversee the fund and report out to investors
● Typically less of a time commitment for the individual angel
● Can supplement direct investment to build a more diversification
● Funds do have fees & carry that impact returns to investors
Like networks, well-run funds can leverage the efficiencies of working

together.
What’s the Magic Number
Angel funds can be a great way to get more diversified for a manageable amount of time. If it is a really
well-run fund that has good processes and good deal flow, that can be a great approach. However, funds
typically come with either a management fee or a “carry” on the profits, or both. Those fees can eat into
your returns in a risky asset class where better than market returns are required for the risk assumed, so
you will want to look for reasonable fee funds and be sure you get good value for your dollar. You
probably also want to stick with funds run by experienced managers. We’ve done an entire book and
huge article series on the topic of running funds, and suffice it to say, it is definitely not easy to do well.
A more subtle consideration with funds is that they can take some of the human capital element out of
angel investing. By definition, in a fund, you are somewhat more passive than the direct investor. If you
are less involved with the companies, (1) not only might it be less fun, educational and rewarding from a
psychic returns perspective, (2) you might be slightly less able to de-risk your investments with oversight,
advice, board service, introductions etc. Of course it is not all extremes, and there are some excellent
lower fee funds and some “get involved” local angel funds that can work very well and might be worth
checking out.
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Equity Crowdfunding - Accredited Platforms
Can be a good fit for angels who:

● Have limited access to good deal flow, or
● Are looking for non-local or specialty deals
Challenges and Issues:

● Not easy to meet founders during due diligence
● Difficult to add your human capital post-investment
● Platforms vary in fees charged, structure, amount of support given
Platforms can turn up interesting deals, but caveat emptor.
For investors who really cannot find an entrepreneurial center they can feasibly participate in and don’t
want to be part of a fund, there is one other type of fishing hole experienced angels can consider.
Crowdfunding sites like AngelList and PropelX (and all manner of other similar sites) can give you access
to deals from around the world. But if you are a beginner, this is an area where you are going to want to
exercise some caution and seek the advice of experienced angels. As I noted in Angel Investing: What’s
the Magic Number? this can be risky because there is no guide, there may be little to no diligence and
you generally are not going to meet the team. There may be no deal lead or direct investor oversight on
the board but some plugged in and experienced angels can supplement their portfolio using these
platforms.
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Equity Crowdfunding - Non Accredited
Companies can publicly solicit investment from non-accredited investors
Strict limits on annual amounts investor may invest
Strict annual amounts company may raise
Strict disclosure requirements for companies
Transactions must happen on special brokerage platforms
Non-accredited crowdfunding is a new phenomenon with very uncertain

risk/return profile.
Understanding Crowdfunding
Equity Crowdfunding Makes Sense For:
● Companies in regions where capital is hard to form

● First-time entrepreneurs who can’t raise from larger investors
● Companies with local or “stakeholder” projects (neighborhood/small business)
● Companies where the buzz is especially valuable or strong customer validation key gating
item
● Projects requiring a broad, engaged fan base
Equity Crowdfunding Doesn’t Make Sense For:
● Entrepreneurs who need value-added investors, mentors and advice to succeed

● Entrepreneurs who need industry expertise from investors to open doors and navigate
opportunities
● B2B companies focused on enterprise
● Experienced “bankable” entrepreneurs who can raise conventionally
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Equity Crowdfunding - Non-Accredited
Expensive money compared to accredited investor angel deals
Risk of adverse selection - last resort for some companies?
Reg CF is a useful framework for situations where:

● Group of stakeholders wish to create a joint enterprise
● Transaction costs are less important than the underlying
cause (deal is more about a quasi-public-good)
Unaccredited crowdfunding may prove to be more about

stakeholders than stockholders.
Understanding Crowdfunding
There is probably a long-term place for both types of crowdfunding in our current marketplace. Product
crowdfunding (i.e. Kickstarter, as opposed to equity crowdfunding) creates a tighter coupling between the
company and the “investor” since the investor is generally buying the product or at least supporting the
cause. As such it creates a community of like-minded people supporting the company.
Equity crowdfunding can do the opposite - it exacerbates the distance already existing between a
company and its shareholders. Historically, significant investors were still pretty involved with the
company - either through geographical proximity or significant due diligence to ensure the safety of a
major investment. And large early investors in a company often helped a company with advice or
connections. These patterns are still pretty common in traditional angel investing. However with modern
crowdfunding those constraints are removed - in theory anyone can invest a small amount in any
company, anywhere, any time, with little or no research.
The question you have to ask yourself - whether you are an entrepreneur or an investor - is can you live
with the trade-offs associated with remote crowdfunding.
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Due Diligence
47
Why Do We Do It?
A well executed diligence effort increases angel investment
returns
Median: 20 hours
Avg: 26% involved more than 40 hours
Overall Multiple for High Diligence 5.9X (4.1 years)
Overall Multiple for Low Diligence 1.1X (3.4 years)
Mistakes are unavoidable, but racking up easily avoidable mistakes

will hurt your overall returns.
Returns to Angel Investors in Groups (Robert Wiltbank and Warren Boeker)
This study is based on the largest data set of accredited angel investors collected to date, with
information on exits from 539 angels. These investors have experienced 1,137 "exits" (acquisitions or
Initial Public Offerings that provided positive returns or firm closures that led to negative returns) from
their venture investments during the last two decades, with most exits occurring since 2004. Analysis of
the data revealed important details of the investment outcomes for angel investors connected to angel
organizations. To assess the role of due diligence, each respondent in a survey was asked how many
hours of due diligence he or she performed for each investment. Angel investors reported the median
length of due diligence prior to investing was twenty hours. Enough investors went far beyond the
median that the mean (average) length of due diligence was sixty hours per investment. For comparison,
formal venture capitalists may spend several months on due diligence, though the actual number of
hours spent working on diligence for a single venture investment is less clear. It is worth noting that
length of time may not be the only important factor in due diligence; future research may explore
methods to assess the quality of due diligence rather than just the quantity.
Spending time on due diligence is significantly related to better outcomes. Simply splitting the sample
between investors who spent less than the median twenty hours of due diligence and investors who
spent more shows an overall multiple difference of 5.9X for those with high due diligence compared to
only 1.1X for those with low due diligence. Sixty-five percent of the exits with below-median due diligence
reported less than 1X returns, compared to 45 percent for the above-median group. The differences
become more stark when comparing the top and bottom quartiles of time dedicated to due diligence. The
exits where investors spent more than 40 hours doing due diligence (the top quartile) experienced a 7.1X
multiple.
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Why Due Diligence is Important
Diligence is not about removing all risk and eliminating all
mistakes
Investing at an early stage - lots of unknowns, there will be
failures
Diligence is about spotting and avoiding the *obvious* mistakes
It’s easy to imagine why things might work. It takes effort to grasp
subtle and complex ways things can go wrong.
The Importance of Due Diligence in Angel Investing
For some reason, in life it seems like it is always faster to imagine the obvious ways something might
work than it is to grasp the sometimes subtle and complex ways things could go wrong. Perhaps people
are optimists, or perhaps it is the tendency to want to believe an earnestly and passionately-told story
from someone who is betting their livelihood on it.
But whatever the reason, more time spent on due diligence always yields a more balanced and nuanced
view. Additional time allows you to get the perspective of different experts, spend time with the team,
educate yourself on the market, understand the psyche of the target customer. If you do not take the
time to put in a little work, you are just making a blind bet during that overly optimistic honeymoon phase,
and you are giving up the chance to consider very easily-discovered issues and to ponder whether it is
realistic to expect a team to work around them.
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During Due Diligence, You Will...
Spend time with the management team

Educate yourself on the market
Understand the psyche of the target customer
Ask common sense questions
There is no right amount of diligence. Any diligence you do is better

than none at all.
Team is by far the biggest focal point of my inquiry. Other factors are important, but none has the
make-or-break importance of questions around team quality. The issue comes down to a simple
realization that an “A team” with a “B plan” will outperform a B team with an A plan every time. Rising
market “tides” do help all boats, but not enough to save boats with holes in them or boats with no
captain. How do A teams do it? An A team is reading the market all the time. They can tell that it’s not
coming together. They pivot before they’ve gotten themselves into such a capitalization hole that there’s
no way the company can ever perform for investors. A good CEO will pivot, but a great CEO will pivot in
a capital-efficient way. She will recognize that the data and the progress are just not there and start to
move early and decisively before the company has raised and spent so much money that the cap table is
just irretrievably screwed up. That takes vision, courage, humility, communication skills, analytical skills,
listening skills, business management savvy, leadership skills, tenacity in the face of disappointment, and
grit and determination. Plus maybe a sense of humor and some healthy perspective. These are the the
things you are looking for. Team chemistry and dynamics are also key - a group of high functioning
individuals is different from a high-functioning team.
Secondarily, I focus on market size and segmentation with a particular attention to the number of
potential customers for whom the company’s solution is a top pain point and a top buying priority. Too
many diligence efforts stop at “yup, I am satisfied that there are lots of people out there who would buy
this.” The question is, where does it lie in their priority list? Are there enough of them who view it as a
“need to have” rather than a “nice to have” that reasonable market share represents a big market?
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3 Guiding Principles of Due Diligence
Identify Key Risks

Develop the Investment Thesis
Acknowledge “What Needs to Be Believed” to Invest
Forcing yourself to acknowledge what needs to be believed

provides a very powerful reality check.
An Investor’s Guide to Due Diligence in Early Stage Companies
Identify Key Risks: After the pitch, distill the story down and create a list of 3 or 4 critical areas that
need further examination. These areas are superficially covered in the investor pitch deck (e.g. customer
problem, market opportunity, management team, competition, financials, etc.). Each topic area is going
to have a few important questions that we need to further research.
Develop the Investment Thesis: Forming an investment thesis means building likely scenario in your
head. A useful filter for assessing potential investment opportunities is the Three P’s: Potential,
Probability and Period. (1) Total Potential of this Company’s Success: Is this a billion dollar IPO
opportunity or is it more likely to be acquired for under $50M? Or something in between? (2) Overall
Probability of Success: Are there a limited number of risks that can be mitigated or are we buying a
lottery ticket for Powerball? (3) Likely Period Until Pay-out: Will it take 10 years to complete the product
and get FDA approval, or could this company be acquired in the first couple years by a big competitor?
Acknowledge “What Needs to Be Believed” to Invest: Once we have a handle on the key risks, and
built an investment thesis, we need to synthesize them into a company hypothesis. The best way to keep
yourself honest when doing this is to actually list “what needs to be believed” for the investment to make
sense. Thus, when we get to the final stage of our due diligence effort, and we write up our very brief
report, we make sure we know and prominently document right at the beginning “What Needs to Be
Believed” or WNTBB. If an investor just cannot get comfortable that something on the WNTTB will come
true, then maybe this deal is not for them. The core of the WNTBB exercise is really a test to make sure
we are not fooling ourselves. It forces us to ask: Have we identified the key risks? Do we understand the
premise of the deal (i.e. the investment thesis)? Is there a balanced logic to the deal?
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Main Areas of Focus in Due Diligence
Team: Are they an “A” team or a “B” team?

Product: Are they selling a “Need to Have” or a “Nice to Have”?
Market: Is the market big enough to support a decent exit?
No plan survives contact with the enemy. A great team can assess,
learn and adapt quickly to survive and thrive. A good CEO pivots…
a great CEO pivots in a capital efficient way.
Team is by far the biggest focal point of my inquiry. Other factors are important, but none has the
make-or-break importance of questions around team quality. The issue comes down to a simple
realization that an “A team” with a “B plan” will outperform a B team with an A plan every time. Rising
market “tides” do help all boats, but not enough to save boats with holes in them or boats with no
captain. How do A teams do it? An A team is reading the market all the time. They can tell that it’s not
coming together. They pivot before they’ve gotten themselves into such a capitalization hole that there’s
no way the company can ever perform for investors. A good CEO will pivot, but a great CEO will pivot in
a capital-efficient way. She will recognize that the data and the progress are just not there and start to
move early and decisively before the company has raised and spent so much money that the cap table is
just irretrievably screwed up. That takes vision, courage, humility, communication skills, analytical skills,
listening skills, business management savvy, leadership skills, tenacity in the face of disappointment, and
grit and determination. Plus maybe a sense of humor and some healthy perspective. These are the the
things you are looking for. Team chemistry and dynamics are also key - a group of high functioning
individuals is different from a high-functioning team.
Secondarily, I focus on market size and segmentation with a particular attention to the number of
potential customers for whom the company’s solution is a top pain point and a top buying priority. Too
many diligence efforts stop at “yup, I am satisfied that there are lots of people out there who would buy
this.” The question is, where does it lie in their priority list? Are there enough of them who view it as a
“need to have” rather than a “nice to have” that reasonable market share represents a big market?
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10 Key Risks in Early Stage Investing
Risk is an inherent part, and necessary ingredient in all successful

companies
The question is whether you understand the risks the company is
taking, and have strategies to mitigate them
Without risk there can be no reward.
Key Risks in Early Stage Investing
Risk is impossible to avoid in business - it is an inherent part, and necessary ingredient, in all successful
undertakings. You shouldn’t be afraid of risk and allow it to turn you away from great investment
opportunities. Instead, you should focus on understanding what critical risks are involved with an early
stage company and the degree to which they have been mitigated with resources, smart planning and
preparation. Understanding the adequacy of these plans is an important skill to develop for all investors.
Risk is not bad; a lack of strategy for dealing with risk is. Remember, without risk, there won’t be a great
reward!
You are looking for companies who are going to challenge incumbents, shake things up and overcome
inertia, but in a clever and calculated way.
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Team Risk
Conduct a thorough leadership assessment

● Review resumes
● Perform provided and “blind” reference checks
● Spend one-on-one time with the CEO
Look for people with integrity, tenacity, book learning and street
smarts
I’d rather invest in an A team with a B plan, than a B team with an A

plan.
Assuming we are not talking about a team that is incomplete, totally lacking in skills, or has terrible
chemistry - you would give a quick “no” in those situations - most team risk comes from the personality,
temperament and character of the individuals themselves. A high functioning team is more than a group
of high functioning individuals, but you need to start with high functioning individuals as building blocks.
You are looking for people with integrity, tenacity and both book learning and street smarts. And having
a CEO with leadership charisma is also crucial. We talk in more detail about these themes in the team
discussion, but suffice it to say, if you are alert, you can generally tell when you are in the presence of
teams that are not working or are composed of lackluster individuals. Remember, during diligence you
are in the honeymoon period - everyone is on their best behavior. If you see even the slightest hint of an
issue, it is best to dig in a little further and get to the bottom of it. If there is trouble at this stage, it will get
far worse when the stress and pressure of operating a start-up mounts.
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Technical Risk
Does the widget exist yet? If not, is there a chance that it may be
impossible to build?
Customer benefits matter. Benefits should approach a 10x
improvement for the typical user.
A company that can hold their own in a detailed product roadmap

review has a lot less technical risk than one that can’t.
When we talk about technical risk, we are asking “Does the widget exist yet, and if not, is there any
chance that it might not be possible to build?” If a software product is in customer hands, even at a V1.0
level, the technical risk is low - it clearly can be built. If you are trying to build a silicon chip that needs to
attain very stringent cost and performance benchmarks, or you are trying to get engineered microbes to
create a substance at commercially feasible concentrations, and you have not achieved either, then
technical risk is high. Technical risk really boils down to a question of whether you have a competitive
offering built, or whether you are still trying to build it.
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Market Adoption Risk
Ask customers and prospects the following...

● What problem does this product solve for you?
● Where does solving this problem fall on your priority list?
● Is your company generally an early adopter or late
adopter?
Look for genuine demand or “pull” from a large enough segment
of customers
If you build it, will they come?
Market risk is also called “market adoption risk” - it is the risk that customers will not want the product.
Will the dogs eat the dogfood? Market risk is easy to begin to probe at - get some demos of the product
into customers’ hands - but extremely difficult to accurately assess. For example, if you survey a bunch
of customers about something innovative and relevant to them, of course they are all going to say they
want it. But…
● At what price?
● At what cost of sales?
● At what level of buying priority?
Market risk is about trying to assess whether there is going to be genuine demand or “pull” from a large
enough segment of customers at a reasonable price, with an acceptable cost and length of sales cycle.
It’s a lot harder than one initially thinks. Many investors have been burned by failing to recognize “false
traction” at the beta customer stage. Market risk and market size are closely related - as you go up in
customer buying priorities, you generally go down in market size - since more people feel a problem
generally than acutely.
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Future Financing Risk
Know the macro market for financing

Know the benchmarks applied by those providing future capital
Look beyond the current round of financing, and ask the
following:
● How much additional financing will the company need?
● Where will that money come from?
● Will it be available on reasonable terms?
● Who are the right investors for the company going
forward?
Build a reasonable plan with the current financing round that

allows some room for error.
Financing risk is about future financing needs. We can take care of the immediate financing needed to
get to the next few key milestones, and likely the next financing round as well, but …
● How much additional financing will the company likely need?

● Where will that money come from?
● Will it be available on reasonable terms once the company has used up the current round?
● Who are the right investors for this company going forward?
● What will the market be like for financing in 18 months? 36 months?
These are issues we discuss when we talk about financing risk. And the only way to really address it is to
know the macro market for financing and the benchmarks applied by those likely to be providing the
capital. Then you can build a reasonable plan with the current financing round that has some room for
error to get the company to relevant benchmarks for the next round.
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Regulatory Risk
Are there any necessary permissions (e.g. FDA approval) to

operate this business?
Not all regulatory situations introduce risk - sometimes they
provide tailwinds; new rules may hasten adoption of a company’s
solution.
Regulatory approvals take time and money. Understand what is

involved and watch for possible changes in the regulatory
environment.
Not all regulatory situations introduce risk - sometimes they can provide tailwinds; new rules may hasten
adoption of a company’s solution. But more often they are a form of permission you need to obtain, such
as FDA-clearance or other certified vendor or standards-compliant status. These necessary permissions
take time and cost money. And they pose the risk that the permission will not be forthcoming. Sometimes
they come not from regulatory bodies, but out of the blue from Attorneys General, such as in the case of
grey area undertakings like the Fantasy Sports sites, DraftKings and FanDuel. Understanding what is
involved to successfully receive regulatory approval or avoid enforcement scrutiny is critical to
understanding the regulatory risk. And then there is always the risk that the regulatory environment might
change suddenly and unpredictably in an adverse manner, so it is important to understand the landscape
of possible changes.
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Competitive Risk
Understand the company’s relative attractiveness alongside their

competitors, and carve out a space with some enduring value
Competitors help educate the market, but they also
● Drive up the length of the sales cycle
● Undermine pricing power and compress margins
● Drive additional spend on R&D
Show me an entrepreneur with no competition and I will show you

an entrepreneur with no market.
Competition is not a problem per se. A favorite joke of mine is “show me an entrepreneur with no
competition and I will show you an entrepreneur with no market.” Competitors can help legitimize a
product category, bring press coverage and help defray the cost of educating customers. But competitors
do affect your business: (1) They can drive up the length of the sales cycle by introducing fear,
uncertainty and doubt in the minds of customers with future product announcements. (2) They can drive
up the cost of sales by creating a lot of noise and counter-selling you have to overcome to be heard. (3)
They can undermine pricing power and compress margins. (4) They can drive you to have to spend more
on R&D to stay competitive. (5) And, even competitors with a worse solution but access to capital can
use brute force marketing and selling techniques to take your market share by sheer effort and saturation
techniques.
Understanding competitive risks is about understanding the relative attractiveness, both current and
projected into the future, of your company’s offering, and understanding who the other players are - both
now and in the near future. Other things to consider include: (1) Are the competitors all similar-sized
peers looking to co-exist in a market large enough for all? (2) Or, are they deep pocketed giants who feel
that domination of the market is strategically important and will give away a product if they need to? (3)
Are there big players in adjacent spaces who could easily jump over into your space once it is validated
as an attractive market? At the end of the day, you want enough running room that you can grow faster
than the market and get enough of a strategic toehold. You are trying to carve out space with some
enduring value.
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Intellectual Property Risk
A lack of awareness and sophistication about IP can be an

important risk factor in diligence
Defensive analysis: Are they free to operate without infringing on
someone’s IP?
Offensive analysis: Can they build IP to protect their space and
block competitors?
Can the company develop patents as counter-claims or trading

cards in case of an attack on the company?
There are two aspects to the IP analysis. The first is a basic defensive analysis: is there some white
space here amongst everyone else’s claims? Are we free to even operate at all without infringing
someone’s intellectual property? The second is offensive: can we build some IP that allows us to protect
our space and block others from competing using our methods? A third aspect to consider with patents,
particularly in crowded spaces, is whether a company can develop some patents that can be used as
trading cards or counter-claims in case someone tries to attack the company.
Beyond the basic strategic offensive and defensive questions, you also need to do a tactical review to
make sure the company is using 3rd party IP such as open source software and other licensed tools
correctly, is perfecting ownership in employee-created innovations, and has proper controls to protect
confidentiality - of the company’s information as well as information entrusted to it by partners. A lack of
awareness and sophistication about IP can be an important risk factor in diligence.
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Legal Risk
What legal issues might be critical for this early stage company?
● Capitalization & Ownership
● Intellectual Property
● Regulatory Compliance
● Third Party Contracts
● Employment Matters
Does the company have its house in order? Is there enough

attention being paid to important details?
Legal Issues for Startups
IP: Verifying IP ownership is critical. Make sure the company has secured appropriate assignment of
invention and NDAs with all past and present founders, employees, consultants or otherwise. If using IP
from a third party (e.g. a university) ensure company has sufficient rights (incl. duration). Understand the
economics of any licenses as well. And finally, make sure the company has freedom to operate relative
to patents belonging to third parties.
Corporate Capitalization: Document each component of the cap structure, including prior financings,
the vesting of employee equity, and the history behind stock to non-founders. A cap table provides a
strong “fossil record” as to the prior financing history, potential issues with legacy founders or promisees,
and the current incentive structure.
Third Party Contracts: Review any exclusive or restrictive contracts. Early stage companies sometimes
do desperate/foolish things to secure revenue. Look for provisions that: (1) grant third-parties exclusive
rights with respect to technology (2) divest from the company rights around a particular field of use (3)
limit the territory in which a company can compete.
Employee Agreements: Verify that key employee agrs and at least barebones policies and procedures
are in place. Watch out for promises of deferred salary and bonus to severance agreements to purported
grants of equity. Often, in courting prospective employees, a naïve company will make informal promises
to individuals that can form the basis for real lawsuits in the future.
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Alignment Risk
How do you make sure the goals of investors and company

founders are in alignment on the following key issues?
● Long term objectives
● Use of funds
● Long term financing path
● Exit assumptions and strategy
Is everyone singing from the same page of the hymnal?
Verifying Goal Alignment
Long term objectives: You need to discuss and confirm agreement on what you are building. Keep in
mind, goal alignment is not a “set it and forget it” proposition. Your goals may be in sync at the time you
first invest, but you will need to check in on a regular basis to ensure they stay in alignment.
Use of funds: Where and how fast the company is planning to spend the cash we are investing? Are
we in alignment on issues such as compensation for the management team, key initial hires and
marketing spend? Do we agree on what we need to learn about product / market fit before we pour on
the gas? Is there a consensus about how many new markets we will enter simultaneously?
Management compensation is often the most difficult financial/spending conversation you will have with a
CEO. Just because they have foregone salary for a while, or used to make a lot in a corporate job, does
not mean they can draw a big salary out of a lightly capitalized startup.
Long range financing plans: Key diligence questions: (1) What is the Financing Risk: What is the
timeline to growth funded by cashflow? Does the company need to raise capital from bigger investors
down the road? If so, how likely is it for the company to attract these investors? (2) What are the
Expected Returns: How will the dilution created by any future rounds of financing affect the returns of
the early stage investor? Capital efficient businesses tend to have a greater variety of exit options,
including some with faster times to exit. Work with the founders to develop a realistic long term funding
plan (or plans) that will lead to a profitable exit for investors & founders. Make sure the investors and the
CEO agree on the point at which the decision will be made to switch plans and understand the risks and
rewards for each strategy.
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Exit Risk
Exit Strategies
● What are the exit opportunities for the company?
● Who will buy this company?
● When will they buy them?
● What will they value them for?
Equity investment is a loan the ultimate buyer of the company is

expected to pay back.
Building an Exit Strategy
Exit strategies need to be discussed with the founders early on. Do they want to flip the company in a
few years or are they building a big business? And, make sure they are not looking for a lifestyle
business! Starting the exit strategy discussion early on is an important part of setting up the company
(and investors) for success. Startups rarely survive without being a part of a larger ecosystem and it’s
this ecosystem that plays the central role in an exit. What are some goal alignment disasters leading to
disappointment for early stage investors? The biggie? Not making money on your investment!
When you decide to invest in an early stage company, you are primarily investing because you believe
you will make a good financial return on your investment. In most cases, when a company makes an
acquisition, it’s because they believe it will produce a good financial return for their business. There are
numerous scenarios where a large company makes an acquisition, but the following 5 cases are the
ones that create the most value for the acquirer.
● A new product that complements a fast growing product line of a large company
● A disruptive product that has the potential to damage a larger company’s market position or
become difficult to “sell around”
● A new product that fills a newly emerging gap in a big company’s product line
● A new product with strategic patents that a buyer cannot risk having fall into a competitor’s
hands
● A new product that is clearly constrained by lack of sales and would be instantly accretive
and profitable in the hands of a larger sales force.
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Develop the Investment Thesis
Potential - How big is the potential theoretical opportunity?

Probability - How likely is the company to achieve breakthrough
success?
Period - How long are you going to have to wait?
All things being equal, we want companies most likely to be the

biggest in the shortest amount of time.
How to Apply the 3 Ps to Selecting Angel Investments When you are forming an investment thesis, you
are building a likely scenario in your head. The Three P’s can provide a useful framework: Potential,
Probability and Period.
POTENTIAL: Start with an awareness of the strategic buyers; ever-changing competitive landscape and
the overall market of buyers of comparable companies. What is hot right now? What is cooling down?
Where are big competitors likely to feel threatened and decide to make a defensive acquisition? If this
company scales and succeeds, who will it be stealing sales from (i.e. “if my company wins, who loses or
is inconvenienced or annoyed?”) Look for strategic buyers motivated to buy the entire company; perhaps
for its strategic position, the threat it represents, the great brand it has built, or the number of customers
or eyeballs. Deals where a strategic buyer is looking for just for a single product, technology, feature or
some engineers will yield much less for investors.
PROBABILITY: In some ways it is easier to start by evaluating likelihood of failure. You can recognize
certain problematic patterns and evaluate what they mean. If that meltdown risk feels pretty low, or there
are some “soft failure” modes where you could recoup your money and maybe a small return, that can be
some comfort. Turning to the success side, you can look at the diligence, gauge the customer buying
priorities and resulting market size, and try to construct a mental map of a couple pathways to success.
In doing so it is essential to evaluate the assumptions you are making. If the only maps you can build
describe really winding routes and assume many things that just are not likely to occur, you are probably
rationalizing the investment and need to be honest with yourself about the low probability. You might still
choose to invest if the potential is high enough but you need to be honest with yourself about the lower
probability of success.
PERIOD: The analysis starts with who the likely buyers might be a few years out. What are the required
milestones before those buyers are even interested? How long is it going to take this company to
achieve those milestones? It always takes longer and costs more, so you should also circle back and
look at the assumptions of what it is going to take and what resources are assumed in reaching those
milestones. Make sure those resources will not only be available but the ultimate buyer will pay enough
to deliver a good multiple on the consumed resources.
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Acknowledge “What Needs to Be Believed”
Core of this exercise is a test… we must ask ourselves:

● Have we identified the key risks?
● Do we understand the premise of the deal (i.e. the
investment thesis)?
Are we fooling ourselves, or is there some kind of balanced logic to

this deal?
An Investor’s Guide to Due Diligence in Early Stage Companies
Acknowledge “What Needs to Be Believed” to Invest: Once we have a handle on the key risks, and
we have built an investment thesis, we need to synthesize them into a workable company hypothesis.
The best way to keep yourself honest when doing this is to take the trouble to acknowledge and actually
list “what needs to be believed” for the investment to make sense. Thus, when we get to the final stage of
our due diligence effort, and we write up our very brief report, we make sure we know and prominently
document right at the beginning “What Needs to Be Believed” or WNTBB. If an investor just cannot get
comfortable that something on the WNTTB will come true, then maybe this deal is not for them.
65
Learning the Hard Way
A handful of avoidable due diligence mistakes

● Team: Confusing likability or prior accomplishments with
the competence needed to pull off the current task
● Market: Confusing early adopter excitement with true
market pull
● Timing: Is this the right time for this idea?
● Product: Incomplete understanding of the dynamics in the
target market
Experience is what you get when you don’t get what you want.
Due Diligence Mistakes
Confusing likability or prior accomplishments on the part of an entrepreneur with the competence
needed to pull off the current task. Great guys or great gals who have accomplished good things in their
prior career endeavors, may be completely over their heads and unable to adapt when driving a new
opportunity. Think hard about what skills the opportunity will require, and make sure the entrepreneur
has, or is willing and able to get, those skills.
Confusing early adopter excitement with true market pull. “Anybody can get the first 10% of a
market.” You need a big enough market of willing buyers who can be accessed affordably (relative to
their LTV). The true market is limited customers for whom the purchase is a top pain point/top buying
priority. Marginal improvement on a marginal cost is not enough in any but the earliest of adopters.
Recognize when you are looking at false traction and do some further digging.
“Is this the right time for this idea?” Dependence on key enabling technologies that do not exist, cost
structures which cannot be achieved, or buyer awareness that is not there are a sure path to failure.
Make sure that the CEO understands what the whole product solution needs to look like and has a
credible plan to deliver it.
An incomplete understanding of the dynamics in your target market. Many companies solve real
problems that unfortunately are not high on the buyer’s priority list. In other words, the company is selling
aspirin or jewelery, not oxygen. Make sure the focus is on one of the top 2 or 3 problems that the target
customer has.
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Angel Roles
67
Angel Roles
Majority of entrepreneurs only look to angels for financial capital
But, smart investors are an excellent source of human capital

● Corporate Board Member
● Mentor
● Advisory Board
If none of the investors in a startup have the ability to add valuable

human capital, you probably shouldn’t invest.
Angel Roles and Human Capital
When entrepreneurs seek out angel investors, the majority are looking for financial capital. Very few
entrepreneurs understand the importance of finding smart investors who will invest both Financial and
Human Capital. At Launchpad, one of our core philosophies revolves around this issue. We aren’t
interested in making investments where our only value add is cash. If we don’t have expertise in our
group that can help an entrepreneur succeed, we won’t invest.
I like to classify the roles that angel investors take on with a startup in the following three categories. The
list starts with the most casual of roles (the mentor) and ends with the most committed of roles (the
corporate board member or director).
1. Mentor
2. Advisory Board Member
3. Corporate Board Member
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How Does a Board Member Add Value?
Board directors can help their portfolio companies be successful

by:
● Recruiting senior management
● Fund raising
● Strategic advice
● Making connections and getting initial customers
● Evaluating the CEO
● Managing risk
● Ensuring a successful exit
It is impossible to overstate the value of having some “been there,

done that” people around to provide tips, perspective and advice.
How Does an Early Stage Board Member Add Value
There are a number of areas where directors can help their portfolio companies be successful. Legally,
directors are required to provide governance and oversight, however the directors of an early-stage
company may choose to be more proactive by adding a great deal of business value and advice. No
director is able to provide value in all areas, but great directors often help where they can and make
introductions to the right resources when they can’t.
Recruiting —Helping bring in the very best people should be a top priority for all directors.
Fundraising — Making sure that a company doesn’t run out of funds is a key part of the early stage
director’s job.
Strategic Advice — Founders need someone with a broader view who can provide both a sounding
board and strategic direction. However, a good director does not micro-manage the business.
Remember, it’s the CEO’s job to run the company.
Making Connections & Getting Initial Customers — One advantage to being a member of a large
angel group is the strength of your network.
Save Time — Directors can help companies avoid reinventing the wheel.
Risk Management — It is the director’s responsibility to ensure stage-appropriate financial controls.
Evaluating the CEO — Directors have a responsibility to ensure that the CEO is up to the task.
Ensuring a Successful Exit — Directors have a fiduciary responsibility to maximize value for
shareholders. Directors need to make sure that the management team understands the path to an exit
that provides maximum returns to all shareholders. Directors should regularly focus on this issue, making
sure the process is understood, the level of preparedness is adequate, and the requisite experience is
represented at the board or company level.
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What’s the Time Commitment?
A board seat is the most significant time commitment for an angel
During a typical year, you will spend 100+ hours with the following:
● 6 to 12 board meetings per year
● Weekly or bi-weekly phone calls with the CEO
● Unscheduled events: candidate interviews, fundraising, etc.
Being on a startup board is a huge commitment. If someone tells you they

are on more than 3-5 boards at once, they are almost certainly not doing it
right.
As a director, you are making a significant human capital commitment to the company. Although you
aren’t an employee of the company, you are expected to commit your time and expertise to the
company. My general expectation for a board seat is that I am committing around 100 hours per year to
the company. I break that down as follows:
1. 6 to 12 Board meetings/year with 1 hour of prep and 3 hours of meeting time (24 to 72 hours)
2. Weekly or bi-weekly phone call with the CEO at 30 minutes per call (13 to 26 hours)
3. 10+ activities for other meetings, candidate interviews, fundraising calls, etc. at 1 hour per
event (10+ hours)
Board meetings are an obvious commitment for all board members. Good board members read all the
board materials in advance and come prepared for the meeting. Between board meetings, I like to stay
informed, and so I will arrange for a weekly 30 minute phone call with the CEO. It’s scheduled for the
same time every week, and gives the CEO an opportunity to ask for my help on tough issues in real time
instead of waiting for the next board meeting. And finally, unscheduled events happen with startups.
Such events include a job interview for a senior member of management, a compensation committee
meeting, or a discussion with a new potential investor.
70
What is a Mentor?
The universe of mentors can be divided into three categories

● Industry Expert: Deep understanding of industry, market or
technology and can give strategic advice and make crucial
introductions
● Company Builder: Successful track record in building and
scaling startup companies
● Personal Growth: Help CEO with professional development
There is no need to choose - every founder should have at least one

of each kind of mentor.
Being a Mentor for Entrepreneurs
The universe of mentors can be divided into three categories.
● The “industry expert” mentor. These are the people who deeply understand the industry,
market, customers or technology and can give strategic advice and make crucial
introductions. Most people initially think of this mentor type.
● The “company-builder” mentor. These are the battle-scarred pros who have been to the
start-up rodeo before and can help with all the generic issues associated with building and
scaling a company.
● The “personal growth” mentor. More like life coaches, these mentors take a genuine interest
in the entrepreneur as a person and want to help him/her with their personal growth and
professional development. They can help an entrepreneur find their voice as a leader and
teach them to deal brilliantly with the sticky situations which inevitably arise.
71
Matching Mentors with Entrepreneurs
A mentor is the equivalent of a wingman… someone who has your

back
You know there is a good match when:

● Entrepreneur feels empathy even when receiving critical input
● Mentor makes time and is responsive to inquiries
● Mentor is truly engaged and helpful to the entrepreneur
Before formalizing a relationship, make sure you do a little due

diligence on your entrepreneur.
Being a Mentor for Entrepreneurs
A mentor is the business equivalent of a wingman. An entrepreneur can feel it when someone has their
back. They can feel the empathy, even in the context of tough questions or really direct feedback. Good
mentors will make time for entrepreneurs and be responsive to inquiries. They are engaged in the
problem. It won’t be the same in each case, and some relationships will be longer than others, but you
can feel it in your bones when you’ve found a good match. Before formalizing a relationship or taking
stock, it is essential to do a little diligence on your entrepreneur. Check a few blind references and make
sure this is a smart, capable, hard-working, high-integrity person you are getting involved with. Make
sure they really understand what it means to chose the entrepreneurial path and they are committed to
seeing the journey through.
72
Key Sins of Angel Investors
The list is VERY long, but here are two biggies:

● Be careful about wasting the time of an entrepreneur
● Just because you are more experienced doesn’t mean you
should take advantage of a rookie entrepreneur
Respect, and a service-oriented, pay-it-forward attitude are the

keys to building a good reputation as an investor.
In Christopher’s article on the Key Sins of Angel Investors, he categorizes 25 key mistakes angels make
in three levels: Mild, Major and Fatal. I won’t repeat what he says here, but I do want to call out a couple
of points he makes. First of all, angels need to be careful about wasting the time of an entrepreneur.
Time is a precious resource for startups, and if you are draining this resource, you are doing more harm
than good. Second, entrepreneurs starting their first company have a limited understanding of raising
capital for their business. Just because you’ve made 20 investments doesn’t mean you should take
advantage of a naive entrepreneur!
73
Appendix
74
Resources - Modeling Tool for Early
Stage Investment Portfolios
A successful early stage investment portfolio has a

mix of strikeouts, base hits and home runs. So how is
it possible for an early stage investor to build a
successful portfolio compiled from companies that
produce such widely different financial returns? To
answer that question, we pulled together a simple
modeling tool that helps you visualize how the
probable returns play out and interact to produce an
overall portfolio return.
Download
Modeling Tool
bit.ly/Seraf_Portfolio_Modeling_Tool
Portfolio Modeling Tool
How do you go about using this modeling tool? To start, we created a sample portfolio of 15 companies
for you to work from. That’s enough companies to begin with for a basic portfolio modeling exercise. For
each company, there are two variables that you need to set.
● First, you will need to put in an amount that you invest in each company. In a portfolio of 15
companies, you might have the same amount invested in each company. Or, you might
decide to distribute your investments in a less even fashion. In the default Google Sheet,
we’ve set up a range of investment amounts. Some companies have as little as $15,000
invested and others have as much as $50,000.
● Second, you will need to chose or “model” the type of exit for each company in the portfolio.
Here is where you determine the multiple of capital each company will return to your portfolio.
Since we are dealing with early stage companies, you will have a real mix of returns. If you
want a realistic model that will be predictive of probable real-life outcomes, we recommend
that you set approximately half the portfolio to total losses (i.e. no capital returned). The rest
of the portfolio can be a mix of moderate successes with maybe one or two bigger wins.
There is one other variable that you can control on this sheet. In the upper right quadrant of the sheet is
a section for the Exit Multiple for each type of exit. We provide values for each exit type, but you might
want to model using different exit multiples. So feel free to change these numbers to fit your needs.
Resources - Due
Diligence Checklist
Designed as a quick reference guide to help steer you

through the various aspects of diligence. This due
diligence checklist covers key items such as:
● Information and documents you need to

request from the company
● Tasks your due diligence team needs to
perform
● Questions you need to ask of management,
customers, references and partners
Download
Checklist
bit.ly/Due_Diligence_Checklist
We have written quite a bit about the importance of thorough diligence and a professional and efficient
overall diligence process. A key element is having a good diligence checklist. Here is the Due Diligence
Checklist we use and recommend. This checklist was developed after many years of investing at
Launchpad Venture Group. Working closely with one of our best deal leads, Gail Greenwald, we put
together this checklist to help guide our internal due diligence process.
Resources - Due
Diligence Report
Template
The due diligence report template is focused on 11
major topics that should be researched and
understood when performing due diligence on an
early stage technology company.
For each topic, we provide you with an explanation of

the topic as well as example questions that may make
sense to discuss in the remarks column.
Download
Report Template
bit.ly/DueDiligenceReportTemplate
This report template is very structured in a three column format. That might feel limiting at first to the
uninitiated, but it is deliberately designed as a table to force the authors to be concise. Experience
conducting hundreds of diligence projects and leading dozens and dozens of syndications has taught us
that it’s important to be succinct in your diligence summary. Otherwise, you will end up with a long report
that investors won’t read through, thus defeating the purpose of the report. If you have important detail or
documents that you feel must be included in your findings, you can make them into appendices and refer
to them in the report, but it can be a slippery slope toward an excessively long package. A better
approach is to keep primary research materials and memos in a cloud folder and make the folder
available to the minority of investors who want more detail.
Resources - Management
Team Assessment
Questionnaire designed to help guide you through

your team reference checks
Focus on questions related to the CEO’s:
● Strengths and Weaknesses

● Communications Skills
● Coachability
● Stability
● Domain Expertise
● Complementary Skills on Management
Team
Download
Questionnaire
bit.ly/ManagementQuestionnaire
During the due diligence process, personal reference checks are a critical step to help prospective
investors learn more about a CEO and his/her team. Some of the references will be from contacts that
the team provides to you. Other contacts should be “blind” reference checks with people in your network
that know the team. This type of background information is useful if you ask the right questions. At
Launchpad, we have a well-defined set of questions we use for our interviews. It makes a handy
guideline you can use when calling the references; feel free to share it with your due diligence
colleagues.
These questions help us uncover red flag issues that we need to keep an eye out for, and it helps us
apply resources to help the CEO be successful. This questionnaire is designed to get the story behind
the CEO and his/her team. If you are able to make enough reference calls, you should be able to find
similarities and differences to help you paint a pretty good picture of the team you are investing in.
Resources - Customer
Reference Checks
Questionnaire designed to help guide you through

product-related questions
Focus is on questions related to solving a customer’s

key problems:
● Problem Being Solved and Priority for

Solving
● Purchase Reasons and Goals
● Expected ROI and Value to the Customer
● Competitive Factors
● Impressions of the Company and Its
Product
Download
Questionnaire
bit.ly/CustomerReferenceChecks
Customer Reference Checks
During the due diligence process, you need to verify customer demand and assess the overall size of the
market opportunity. The best way to do this is by reaching out to current customers and prospects for the
company’s product. During our customer/prospect calls, we focus some of our initial questions on
understanding the customer’s key pain points and try to discern their buying priorities. At Launchpad, we
have a well-defined set of questions we use for our interviews. It makes a handy guideline you can use
when calling the references; feel free to share it with your due diligence colleagues.
At the core of this questionnaire are a series of questions that will help you distinguish whether the
company is selling aspirin, oxygen or jewelry. And, you can find out a bit more about the size of the
potential market opportunity.
Resources - Guidelines for
Successful Board Meetings
Running a successful board meeting requires

planning and discipline. Which in turn requires some
experience and some guidelines. Without this
preparation, you will waste precious time focusing on
the wrong things. To help you orchestrate great
board meetings, we pulled together a collection of
well-tested guidelines that will make any early stage
company board more productive.
Download
Guidelines
bit.ly/BoardMeetingGuidelines
Key areas include:
● Topics you should cover in a company’s first board meeting

● A high level agenda for regular board meetings
● Typical board calendar structure for early stage companies
● An overview of the package of materials that are sent out in advance of a board meeting
● An outline for a quarterly report to all investors
Continue Your Angel Education
and Improve Your Investing Skills
The Seraf Compass guides early stage investors in making better

investing decisions, minimizing risk and improving returns
Introduction to Introduction to
Angel Investing Angel Investing
Articles eBook
bit.ly/Angel101Articles bit.ly/Angel101eBook
Introduction to Introduction to
Angel Investing Angel Investing
Hardcopy Book Tools
bit.ly/HardCopyBooks bit.ly/SerafToolbox
81
From Investment to Exit: Insights, news,
thought leadership and in-depth
resources for early stage investors
ACCESS OUR
CONTENT
BLOG
BOOKS and
eBOOKS
TOOLS
FOLLOW US ON
SOCIAL MEDIA
82
Books from Seraf
Fundamentals of Angel Investing

A Guide to the Principles, Skills and Concepts Every
Angel Investor Needs to Succeed
Angel Investing by the Numbers

Valuation, Capitalization, Portfolio Construction
and Startup Economics
Leaders Wanted: Making Startup Deals Happen

Advanced Techniques in Deal Leadership and Due
Diligence for Early Stage Investors
Guide, Advise and Inspire: How Startup Boards

Drive Growth and Exits
An Overview of the Principles, Skills and Concepts Every Early
Stage Company Board Member Needs to Succeed
Venture Capital: A Practical Guide

A Guide to Fund Formation and Management
83
84
AUTHORS
Hambleton Lord
Christopher Mirabile
CONTACT US
www.seraf-investor.com
www.angelcapitalassociation.org
www.seraf-investor.com
85

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INTRODUCTION TO ANGEL

1 Host many international,

Fuel the success of

4 DATA & RESEARCH

Insights and education, combined

Welcome management tools allow investors

Ham is Co-Founder of Seraf and the

Christopher is Chair Emeritus of the Angel

INTRODUCTION DEAL FLOW

INVESTMENT PROCESS APPENDIX

It’s important to understand what you are getting into or your

“Luck is a matter of preparation meeting opportunity.” - Seneca

Read this first: A primer for new angel investors

● What an angel is and where they invest

● Financial concepts used to build a successful angel portfolio

● The angel investing process from start to finish

● Where to find interesting investment opportunities

● Why it’s important to undertake due diligence before investing

● The importance of investing both financial and human capital

Read this first: A primer for new angel investors

● What an angel is and where they invest

Some common themes include:

For experienced, successful, energetic people who want to give back,

What Exactly is an Angel and Where Do They Invest?

To overcome inertia of “familiar & good enough,” new products need to be

What Exactly is an Angel and Where Do They Invest?

$0 $500K $10M $100M $250M+

SEED STARTUP GROWTH LATE STAGE

Founders Venture Capital Venture Capital

Angels have finite financial capital combined with valuable human

What Exactly is an Angel and Where Do They Invest?

Illiquid private company investments (e.g. Angel Investments, VC) should

How Successful Angel Investors Allocate Assets

All successful portfolios are either diversified or ridiculously lucky.

A single 10X return will pay for 9 mistakes.

What’s the Magic Number?

Diversification is more than quantity. Consider building a portfolio with

Invest in a few companies which allow you to be involved and leverage

Macro-economic cycles vary, as do industry cycles - a large and diverse

Building a Startup Portfolio That Will Get You There

Here is one example of the level of commitment it takes to build a

How Successful Angel Investors Allocate Assets

1. You invest in 3 new companies per year at $10,000 each

Angel investing is properly classified as high risk, with the potential of

Your goal is to recognize opportunities with the potential to deliver excess

Building a Startup Portfolio That Will Get You There

Therefore, angel returns must be higher than liquid investments like

To understand likely returns, you need to analyze the capital structure,

Building a Startup Portfolio That Will Get You There

Angel Follow-on Theory

Angel Investing returns are more challenging to track than public

Angel Investing Returns: Research and Reality

Angel Investing Returns: Research and Reality

By % of financings in companies going out-of-business, acquired, or IPO

Includes data from Dow Jones VentureSource and

Less than 1 out of 20 venture-backed companies turns into a home run.

The Mix of a Winning Startup Portfolio

97% Exited through acquisition

Startup Pathways to Success

If you build a portfolio of 20 companies, what can you expect?

Angel Investing Exits: Base Hits to Home Runs

The Mix of a Winning Startup Portfolio

FIND SCREEN PITCH DILIGENCE

CLOSE DOCUMENT SYNDICATE NEGOTIATE

Diligence is about spotting and avoiding the obvious mistakes