A Deep Dive Into Angel Investing for Engineering Leaders

In the 2nd segment of our 3-part series on angel investing for engineering leaders, Nichole Wischoff and Emma Tang dive into the practical elements of angel investing. You can catch-up on what you might have missed in part 1 here.

Emma is an angel investor who focuses on infrastructure and fintech projects; she was previously an engineering manager in Data Infrastructure at Stripe. Nichole is the founder & General Partner for Wischoff Ventures. She was a very early employee at Blend, One and Built Technologies, working directly for the CEO/Co-Founder, where she spent more than six years building and scaling multiple new business initiatives, managing M&A and raising over $350M.

You can find some of the highlights from our chat below:

Acquiring Deal Flow:

Emma Tang:

Last time Nichole helped us go through the basics of angel investing, what it means, some of the common terms you'll encounter, and how to get started. Today we're going to dig a little bit deeper into how does one actually get good at this, what are the kinds of strategies to be maximumly helpful. So let's start from the very basics. How does one get deal flow? What is deal flow?

Nichole Wischoff:

So deal flow is really just access to companies raising money when they're raising and having an opportunity to invest in that round. I'd say everyone is different. For me, I am a master networker, love people, and am relentless about reaching out to folks I don't know and also just cultivating great relationships. So something that's been really interesting and insightful to me, transitioning from operating to investing, is how communal venture is. In venture, you want other people around the table, right? No single firm or partner is going to solely contribute to the success of a company, right? It takes a village. And so it helps to have experts around the table and around, and not just have it be a single firm. Some firms have sharp elbows, maybe that's for another chapter, largely because they have really big funds and they need to write really large checks to make it meaningful for them. In which case, you kind of get pushed out. That's probably not as common.

That's probably not as common. So deal flow, a number of areas, one, your network, letting people know that you're investing and that you want to see a certain type of deal. So if you start to learn what you like, you might say, "Hey, while I work in climate tech, I really like healthcare tech. I want to invest more in these companies." Sometimes that's tougher because your experience is in one area and so typically startups want to find you if they know your angel investing, and they'll say to their network, "Who do you know that's amazing in climate tech that's operating, that really gets the day to day and can help me with ABC?" And so I often get a lot of deal flow based on my operating experience. So you should make it known, if you're looking to transition outside of areas where you're known for being strong and try to build a network there. So I would say if you operate in FinTech, you want to invest in FinTech, just raise a flag and say, "I'm an angel."

Try to get involved with friends starting companies, let them know that you want to meet their friends starting companies. For me, a lot of it's been organic transparently. I made a handful of investments and then my founders told their lead investor about me. And then the lead wanted to meet me to do more deals together. And so it sort of is a viral thing and organic in a lot of cases. So other VCs always want to collaborate, which is really fun. They want to know what you're seeing and you want to see what they might be seeing.

A lot of it is just keeping a great network, always working on building it. I take calls with everyone. I think at a certain point, maybe I won't, but I try to talk to maybe 10 new investors a week. There's a lot. I'm always talking to both my founders and new companies and it sort of organically creates a flywheel of, "You should meet Nichole." So I think just putting yourself out there, letting people know what you do and where you're great and also what your value will be and then I think a lot of that just sort of starts to flow in from multiple different channels.

Emma Tang:

I think there's a huge gradient of how much you can do in terms of being an angel investor. You can be quite passive and only passively hear about deals that maybe your close friends are doing and participate there. And then more proactively going after deals. I do feel it's like a process that people will find a sweet spot that they personally feel comfortable with. If you are in a specific area, much like Nichole said, if you're in climate or if you're deep in infra, the deals are very close to you. You probably have the most alpha in, because not many people have heard of this, not many people know about this. The fact that you're in this ecosystem and you hear about this and you know these companies are starting, that's actually a pretty good indicator that there is some alpha there that you might want to look into.

Whereas I think the for broadly available deals, you might not be the right person to kind of support their mission. And second of all, it might be too broadly available and therefore you want to evaluate whether there's enough alpha there. So I would say that starting from around you is actually a really good strategy to start. Don't think like, "Oh man, I only know about Kafka Tooling. Oh man, I need to learn more about like something completely different." No, it's what's around you is actually probably a great opportunity for you to learn more about.

Kind of related to getting this deal flow, you mentioned cultivating relationships with different types of folks. I think as an early angel investor, how would you go and find these folks to reach out to? Obviously within your own network, but is there any other way that you would encourage people to go about this, either to find investment opportunities or to find people potentially to learn about more investment opportunities?

Expanding Your Network:

Nichole Wischoff:

I would argue that net, if you were an angel operator writing smaller checks of your own money, you are a VC's best friend because you add probably more value than most investors that have significant allocation. They bring capital, but they don't have the deep expertise. And so I would say figure out what you want to invest in. And that could take some practice. I talked to healthcare companies and climate tech companies and restaurant point of sale. I talked to every type of company and dev tool companies and realized this is not my thing. These are five areas I want to invest in and I don't invest anywhere else. And these are the stages I invest in. And once you have that focus, if you want it, you can be kind of category agnostic and invest in everything. But what I would recommend is either go to a founder you've already invested in and say, "Who are your favorite investors? And can I meet them because I'm angel investing and I'd love to add value to their companies or their future companies?"

And then ask for an intro because no VC would ever turn down an opportunity to build their relationship with a great angel that writes a 25K check. If they know that you've added a lot of value and founders can vouch for you, they would love to invite you into deals and let them know where you're focused, right? A lot of firms are pretty focused or the specific partners are. And so I'd recommend just even DMing on LinkedIn. Maybe message a partner at Graylock and just say, "You guys do great FinTech investing. I've worked at Stripe for five years. I'm starting to angel invest. I'm really strong here. If it makes sense to collaborate, I'd love to meet." And I can guarantee everyone would want to chat. And those would be great messages to get. I would love those messages as well, like, "Who can I bring into deals that's really wonderful, that can add value in ABC areas?" And so I'd say just find who's a match for you and then reach out and try to align on that.

Emma Tang:

We talked a little bit about getting deal flow and I think a lot of new angel investors are a little bit timid about actually going to the conversation with founders and trying to convince them that they're the right person to kind of put in a check. How would you think about the actual conversation with founders and kind of like, in large transactional terms, winning the deal? How would one approach and think about that conversation?

Nichole Wischoff:

Yeah. You know, for me personally, I do the work and then I don't really ask, which might sound silly. And what I mean by that is I get an introduction to a seed stage company. They're building mortgage infrastructure. I happen to have a mortgage background and we get on the call and for 25 minutes we dig in and I point out a couple things. And I know I have a few introductions to make and we really jam, and I walk away from that already adding value and already having a few takeaways.

In the last five minutes, I would say, "Also I have a fund. My check size is X." So maybe for an angel, I don't know, $10,000. "I would love to do more of this with you. And please, I'd love to put in $10,000 into your company." Or if you're not ready yet, you could say, "I typically write $10,000 checks. I'd love to spend more time together," and plant that seed early. And then if you know you want to invest, let them know. "I'd love to do more of this with you. I'd love to put in $10,000. Pencil me in." I usually say that I just assume they're going to say yes and I say, "Pencil me in for $10,000. I'm going to follow up with ABC and let's plan to talk again next week." And they know, and then they already know. Trust me, people will know in a short time that you're a value add. They'll know in the first call. And so I would highly recommend putting your money where your mouth is up front, adding that value in that session, and at the end, let them know you're a check size and let them know that you're interested.

Emma Tang:

I think once you start being helpful, it is kind of a flywheel because people do talk to each other and therefore, your reputation gets established. And in a way you almost have to do less work. In terms of getting deal flow as well as convincing the founder, they naturally will gravitate towards you. Which begs the questions, in every interaction trying to be helpful, is there anything else that you think is useful to kind of establish a brand as an angel investor? I know there are some angel investors out there that have a really great brand, like Elad Gil and other folks out there. And I'm just wondering is there anything else you think is useful to kind of establish that brand or is it mostly in the daily, in every conversation?

Establishing Your Brand as an Angel Investor:

Nichole Wischoff:

Yeah, I'd say a few things. And I want to even go back a step and say the strategy for winning allocation in a deal will vary as you need to write bigger checks. So I think the strategy I just mentioned totally works if you want under maybe $50,000. I think as you start to want more than that, it's definitely more of a fight, right? It's harder to carve out $200,000 and it gets more competitive because now you go from competing with other angels to competing with other firms and then that strategy is different. But for the sake of this conversation, I would use that. On brand building, and I go back and forth on this, I think the things that I've done and I don't even know what my brand really is at the moment, but starting to use Twitter, tweeting really openly. I get a lot of feedback, like, "I love your Twitter. I love how honest you are. I love your takes on what's going on and how you're building a firm. I'd really love to spend time with you." It also depends on your style. If you're more introverted and you like the one-on-one time, you can really rely on your founders talking about you and you can also let the new potential founder know, "Hey, if you want references, LinkedIn and newsletters are not really my thing. I'm more of sort of introverted. That's not my style, but please refer to the folks in my world that I've helped because they would love to talk to you about the areas that I've helped with." So I think around brand, that can really be what you want to be. I've actually noticed that some of the best investors in the world have no online presence whatsoever.

They've let their value speak for itself. And they've put a lot of work into that over 10 years, but they don't talk to the press. There's no Twitter, there's no LinkedIn and they manage billions in AUM and they're on the Midas list and amazing. And so it really can be what you're comfortable with. I think number one is just letting people know that you're out there and actively communicating, even to the individual one-on-one conversations you have, "Here is who I am. Here are the checks I write. Here's where I add value. And I'd love to do work with your other friends, founders," or as a VC firm, with some of their portfolio companies.

Emma Tang:

Once you put that check in, what is the ongoing kind of relationship like with the startup and the founders? How often do you check in? Is it more like a push model or pull model? How much should you ask about how they're doing or not at all, or wait for quarterly letters, anything at all? Because a lot of us just don't have that much experience there at all.

Ongoing Relationships with Founders:

Nichole Wischoff:

Well, the good news is there's no perfect recipe. I think at minimum I have been given feedback... So when I was angel investing and had my first fund, I still had a full-time job and I was so paranoid that I wouldn't be helpful enough that I think I was too helpful. And what that means is I talk to them every week, the founders have my cell phone number. I hop on the phone at night. I'm always on. And then I remember talking to a top tier firm and they're on boards of companies and I was talking to a partner and I said, "How often are you in touch with your founders?" And they said, "Oh, every two months is normal." And I was like, "What?" And I've been told by other investors that I give too much value for the ownership that I have, which means I have very little ownership in a company, but I help more than maybe the lead investor.

So I will be transparent in saying I am personally still trying to figure out what that value is. I think a great seeds investor gave me advice once. And he said, "I always tell my team," because they're high velocity. They do a lot of deals. And he said, "Look for your minimum viable value." And he said, "For everyone, that could be different," but he said, "I can guarantee you are working too hard for a company and that you have to scale yourself." So it's a lot different if you have one company you're working with a year from having 50. And so I think for me, I think checking in once a week is probably too frequent. I find that upfront when you first make the investment and they're just getting started, they might need a lot from you from two to four weeks.

Because they might have a specific meaty thing they want you to work with them on or maybe you help them interview candidates. So you might be really involved up front for those first few weeks when the deal closes, but then they might just check in with you. And I always say, "Here's my cell." Everyone has my cell. "Call me whenever, email me whenever." And then I kind of leave it to them so I don't feel like I'm burdening them, but I think it's really what you put in. I think a lot of the work is kind of in sprints, but you would be amazed that I think even spending a few hours with the founder up front is probably more than their lead is doing, I am learning. And I really do think the bar is low to add value and I think it's spending some quality time and a few hours even a month maybe with the founder I actually think puts you in the top probably 5%.

Emma Tang:

I wonder have you noticed a change in terms of how founders view angel investors? Is there a sense that they feel there's increasingly more value they can get from angel investors and solo GPs and therefore, they're shying away from taking larger allocations from funds? Or is it still not very clear? They still prefer mostly institutional money, over angel checks.

Nichole Wischoff:

It totally depends. So I would say that that is more and more common and I've actually been advising towards it. And I might even be competing with myself in saying this because I write bigger checks now, at pre-seed, having people around that have built what you're building, know a lot about what you're building, in the same market, that can be insanely helpful and help you miss potholes and do all of that. I always strongly recommend, if you're raising a million and a half to $2 million really lean on strategic angels and you can easily fill the round with folks that are operators and amazing. What I would add is I think it gets really tough... At Series A, you need to be thinking about having a top tier fund lead. I think signaling is still a thing. So people want to see top tier names. You do need more capital and your angels can't offer that.

So my second angel investment, I won't name the name because then I'll throw the lead under the bus, but my second angel investment I did, top tier firm led it, $2 million pre-seed and they took a chunk. I was one of maybe five angels. I was still operating and I spent hours with this founder because he was trying to find the sponsor bank and I know a lot about that and trying to figure out if he should work with the bank as a service provider. And so we were figuring all that out and negotiating and first hires. And by the time he raised his seed, he said, "I never want to work with a top tier firm again." And he said, "They spent one hour with me in six months. You helped me more than anyone on the cap table."

Emma Tang:

That totally makes sense. Again, from an angel investor perspective, I'm curious what you feel. As kind of a slightly related question in that a lot of angel investors, they like to see a big name fund lead the investment and then they'll jump in. If you see a syndicate, they have a bunch of deals. How do you evaluate these deals? Some people will just be like, "Oh, there's a great lead investor, and therefore, I'll jump in." Do you think that's kind of like a rational strategy? Or do you think there's some things to caveat that with? Or how do you evaluate that? Would that be a sane investment strategy for an angel investor?

Evaluating Deals:

Nichole Wischoff:

Yes. I'd say especially if it's north of seed, there isn't really a way to underwrite a pre-seed or seed company if they have no products in revenue, right? So it honestly is finger to the wind. So even if Andreessen's leading a pre-seed, it's like, okay, but they know secrets that you don't. If you're an angel investor and you're not spending countless hours doing underwriting and diligence, following a big top tier lead isn't a bad strategy, right? You are piggybacking off of their underwriting. You're piggybacking off of the reference checks they did and they probably talked to a lot of customers. And so it's easier for you to say, "If Sequoia led this deal, they did a lot of work. And there is data, there is revenue, there is a product." And I mean, not everyone's perfect. I think some folks probably regret some deals just because the world was moving so fast for the last few years that I don't actually know if people wrote memos before they invested. But I think your chances of that company working out and trusting the lead firms that did the work for you is a real thing. I think that that's very gray at pre-seed, seed because there's just nothing. You have the same data points that an Andreesen does at a pre-seed, which means you met the founders, you did some work on that market. If it's a market you don't know, then maybe they do have a leg up, but there's less data points and less special sauce I think at those earlier stages.

Evaluating Your Progress:

Emma Tang:

That totally makes sense. I guess, as we're going through the process of angel investing and becoming better angel investors, whatever the definition is, how do you think about evaluating how well you're doing? I'm curious about your personal kind of North Star metric or is it more qualitative measure of like, "Am I doing well, am I doing better?" Just curious how you evaluate things and how you would recommend a new angel investor to see if they're doing the right thing, or if they're doing better on the angel investing kind of side of things.

Nichole Wischoff:

Sure. I'd say it's the same across the board. I think whether you're angel investing your own money or someone else's, multiples, cash on cash returns is how you know if you're good. And it takes a while. So you could say, "Wow, I really..." Okay, step one is, "Did I get into that deal?" Like, "Oh, I really want to get that deal. I get great lead got into that deal." That's win number one, right? That's the short-term win. And then it's, "Okay, did I add a lot of value?" Because that is a way to keep your brand momentum.

But what it really comes down to is great, you're in the deal, great, you helped a lot, but is this company essentially getting marked up? Are other people validating that this company is good? And ultimately revenue, right? Do they have product-market fit? Are they generating revenue? How's their burn? And ultimately, is another investor doing their A and doing their B? And your multiple on your investment is the bottom line. All your LPs, if you want to have a firm, those limited partners, they want multiples, right? What is that cash on cash return? And that is how you know you're good at investing, period, whether it's your own money or whether it is someone else's.

Emma Tang:

How long does it actually take for you to see your investments kind of get marked up as well as exit, eventually?

Nichole Wischoff:

I was hard on myself because my angel investments I made in 2020 were all marked up in about six months and smashing it. And then everything got marked up last year. So that's sort of a caveat. I've asked other investors what is normal between rounds and I've heard about 12 months. And so from the day you put in money, expect there to be a a year or so that goes by and I think that's standard. In the hot market we were living in, it was faster because people would do A's with no revenue. Now that that won't happen anymore, that six months from seed to A is going to turn into 12 plus. It takes a while. And just because they raise an A and have some revenue, it takes years, right? The fund's life is 10 years for a reason is because it takes so long to have an exit. So an exit is an acquisition, or they had an IPO or did a spec. I don't know if specs are still going to be a thing. And you can actually have real money, but it's all sort of not real, if you will, until there's some form of exit, which takes multiple years.

Emma Tang:

As we're wrapping up, I was wondering are there any last things to kind of mention about angel vesting, kind of notes to keep in mind, or tips to get started or any myths that you've seen that should be busted, anything that you think will be useful for someone who's getting started?

Final Thoughts:

Nichole Wischoff:

I think a great thing to do is keep track of every company you talk to, if you can. Just have a spreadsheet, take notes. If you pass, write down why. If you invest in a company and your excitement's like 12 out of 10, score it. If you invest in a company, but you're still kind of like, "I think I'm like 9 out of 10," write that down. It'll be an amazing way every six to 12 months to go back and look at how your companies are performing and what you thought and how you rated them.

I think you'll be really surprised at the companies that stand out. I think it's a great way for you to learn from yourself. Was I looking through the right lens? Wow, actually those nine out of tens, instead of 12 out of tens in the beginning are outperforming the other companies. Or you might find that the ones that are so overhyped do the worst. So I would highly recommend. You're going to learn the entire time. I learn every second. I see new things every day. Take notes, what was I thinking when I did this for yourself and you'll start to improve and reiterate and see probably some surprises throughout the process.

Emma Tang:

Thank you so much, Nichole, for your time. And thank you so much to ELC for providing this forum for all of us to learn.