An Introduction to Angel Investing Pt. 1

Engineering leaders are uniquely positioned to identify and solve some of the most pressing issues in tech. Some choose to start their own companies, while others support emerging companies by angel investing. But what is angel investing? And how can I get started?

We hosted Emma Tang and Nichole Wischoff for the first of a three-part series introducing angel investing to engingeering leaders. 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 starting with some of the questions from session attendees:

"Is it recommended to manage the money as a fund. For example, I set aside 100K for angel investing, spread it out to 10K per company so I can have a portfolio of 10 over time... expecting some to give no return and some to give nx returns? Is this the right way to manage it?

Nichole: If your plan is to optimize for returns (some angels really just want to support their friends) the short answer is yes. My best advice is to treat it as if it isn't yours. Think about portfolio construction, strong conviction in companies, keep notes of why you invested, etc.

"As an investor, what level of involvement should I expect to have with my portfolio companies? Should I feel bad if I just fire off a check and only read the quarterly email updates?"

Nichole: It totally depends. If you are writing checks under 50k, expectations are minimal. Ultimately set expectations with founders and let them know how involved/helpful you want to be.

What is angel investing?

Nichole: Angel investing is taking your own personal money and investing any dollar amount into a startup. That could be, you could write a track into any stage company, pre IPO, and it could be anywhere from a few thousand dollars to, I don't know, maybe a million dollars. There are some requirements, which I think we'll dig into on the accredited investor side, but ultimately it's you investing your personal money into startups.

Why do folks get into angel investing?

Nichole: There's a number of reasons. I have a lot of friends that are technical, working at great companies that might want to start their own companies someday. And so they want to exposure to the early innings and true zero to one foundation of being a person with an idea. And so oftentimes angel investing gets you a front row seat to what is really going on in the beginning of this.

I think another reason could be out of curiosity and interest in new spaces. Maybe as an engineering manager you've only lived and breathed this one area for a few years. And so you want to scratch an itch and be able to help other startups and other founders that are building in a completely different space, that you feel like you can flex your muscles and add value in areas that might change up your day-to-day.

And I think the third reason might be building your own portfolio, trying to see returns and really learning what investing is like. And how to think about it from a financial perspective to say, "How do I turn this $25,000 into $100,000," and keep building a portfolio for returns.

Emma: I would add on that, it's great to be able to talk to these smart founders and learn what they're thinking about, and what's the cutting edge of technology and entrepreneurship. So the exposure to this founder network has been super interesting and important for me.

Another part of it I think is, most of my angel investments are to my friends who I really believe in. You know them as a person, you just know they're going to do great things. And it's a small way to be a part of the journey and help in ways that you can, and for them to have the more official partnership with you in the journey itself. I find that to be really cool as well.

What do some of these acronyms mean?

Nichole: I'd say the first thing, let's start with, you're an angel investor and you decide that you want to start investing your own money in your friends' companies. The most important thing to understand there is that you do have to be an accredited investor. An accredited investor is someone that makes at least $200,000 per year for two consecutive years as an individual. And it's $300,000 a year jointly. Or, as an individual or joint net worth of at least a million dollars. And then lastly, and I have some friends doing this because they don't meet the dollar amount criteria, you can hold a Series 7, a Series 62 or 65.

If you're an angel investor and you decide that you ... Let's say in my case, I wanted to go raise a fund and be a GP, which means general partner. General partners get carry in the fund. They write checks, they make investment decisions. And it can vary based on the stage of the firm and things like that. If I decide that I want to go raise a fund, I am raising money from LPs. LPs are limited partners, and those limited partners can be ultra-high-net-worth individuals. They can be endowments, some institutional. They can be family offices. They can be other big VC firms. 

Syndicates, the last piece here, are really interesting. You can be an angel investor, and this is common, and use a platform like AngelList. And on AngelList you can essentially invite in, let's say, anywhere from 10, 30, 50, 100 of your friends that also angel, and then they can pull together and be a part of your syndicate. And what you do is you just bring in deals.

Let's say a founder gives you $100,000 in allocation so that you can invest in their $3 million seed round. You might not have $100,000, and so you might write $5,000 of that. But you'll bring it to your syndicate, write a short memo, outline the deal, and then allow that pool of people to decide how much they want to invest in that company. In that case, they're not really limited partners. You're just pulling together a syndicate and bringing them deal by deal. And the folks can decide how much they want to contribute and in which companies they want to invest in.

Emma: The difference between syndicates and let's say an actual fund with LPs, is that for syndicates it's deal by deal. So members of the syndicate can choose deal by deal whether they want to opt in and how much they want to opt in. Whereas for a fund, you're bought in and you leave the decision-making to the general partners of the fund, who will invest in deals depending on how they see fit.

How should eng leaders approach angel investing?

Nichole: Some of my favorite investors to co-invest with, that now do it full-time, were past engineering managers and technical leaders at startups. You bring a very unique skillset that I would argue is lacking in venture, which is, especially at the early stages, I should caveat, which is you need a technical leader when you're building software.

And I'd find oftentimes that typically non-technical founders start with the idea, they're typically product managers. And a big question I get investing at pre-seed and seed is, who do you know that's technical that would either be that first technical hire or want to be a co-founder CTO. And it's the most crucial piece to the puzzle. And they need help thinking about architecture and digging through API docs. And, "Are we setting this up correctly and are we working with the right partners?"

I'd say there's certainly a lack thereof in terms of great advisors, people you can lean on helping you hire other great engineering talent. And so you likely don't even realize these things are a huge value-add, but most people don't even know how to handle an onboarding process or an interview process in the early stages. It's a number of things that only you, as an engineering leader, would have experience in and access to.

Emma: Speaking from my own experience, I would definitely encourage engineering leaders, engineering folks, to at least learn a little bit more about angel investing in that it's a less competitive landscape in a way because a lot of startups, they do want advisorship or input on the engineering side. And it's really hard to find the right partners and angel investors to partner there. Actually, as an angel, I think as an engineering leader, there is an advantage there in terms of a lot of companies that actually do want your help. I totally agree with Nichole.

There's a lot of day-to-day things that are very translatable. For example, how do you approach potential engineering hires? How do you approach candidates? How do you sell them? What do engineers get excited by in the conversation and how to touch upon those things.

I think those are all extremely important things that startups want exposure to that may or may not directly translate to what you do day-to-day in terms of your functional area.

How is the current market adjustment impacting angel investing?

Nichole: I'd actually argue that a lot of investors that even have been at this for 10 years also haven't really seen a downturn, and a lot of folks have been living in a bull market. So I think all of us are learning and trading notes. And then working with folks that have seen the upticks and downs.

What I would say is more broadly is that, and while we're seeing this in growth stage, companies raising money, valuations are coming down. Right from public markets, it seems to start there. And I believe there's a six to eight month lag in privates. And so we've seen a significant decrease in just in terms of valuations at growth stages.

And then as an angel investor, depending on where you want to get into companies, I definitely think in this market, one, what better time to be investing. When valuations hit more of a normal, they're not sky high. You're not investing in a seed round that's $50 million post, which is very high, for the record. And so you'll start to have better opportunities. Your money will go further. So that 25K is going to go a lot further in a lower, more reasonable seed valuation than it would have in the last few years.

Emma: From my personal perspective, it's always a good time when valuations are being adjusted lower. It's almost like if you invested in S&P 500 at the bottom of the market in 2009, you've been doing very well. When the market is adjusting down is actually when people should be thinking about investing a little bit more than at the height of things, like last year and the year before.

So how does one get started?

Nichole: I would say, find people in your network and your life that are friends that are starting companies, and start writing smaller checks into your friends' companies and let the world know what you're up to. Let your founder friend that you just invested and know that you want to angel invest in more companies. And that if their friends start starting companies, that you would love to meet them.

And I'd say it pretty much organically, if you put it out there, folks will start to tap you. And let them know also what you're going to be helpful with. "Hey, I can help you with your architecture, or thinking about hiring and recruiting and compensation." And just let them know what you can be useful for. And people keep their ears on the grounds, and you'll be inundated with founders, I think, if you open up the floodgates.

Emma: I also got started because my close friends started companies and I'm very excited for them, I think they're really great. And they also appreciate my experience in certain areas like engineering. Exactly like Nichole said, don't be shy. Tell people what your experience is and what your skillset is, and people will seek you out. Sometimes it's just a few conversations and you really hit it off, and that's the beginning of a really great partnership. I guess, just put it out there and these opportunities will find you.