How to angel invest, part 4: deal flow
You’ll get more out of this series if you’ve read part 1 (high-level angel investing guidelines), part 2 (debt, equity, and key terms), and part 3 (company stages).
How you find companies — and how they find you — is called deal flow. As an investor, it’s your form of marketing and sales where you have inbound deal flow (founders come to you) and outbound deal flow (you reach out to founders). Deal flow is the lifeblood of investing. You can only choose your companies from the pool of those you look at, so you need the best ones to cross your path.
How do you get deal flow? Most importantly, by having a reputation for being knowledgeable, helpful, accessible, and good at backing companies. Deal flow can be a tough ball to get rolling: you’ll often wade through hundreds of low-quality companies before you find the gems, but once you have some successes, more and more top tier people will come to you. E.g., if you backed an enterprise SaaS company early on as an angel that had a big exit, up-and-coming enterprise SaaS founders will seek you out.
Do what works for you; no one’s personal style is the same. The key to deal flow is to be authentic and true to yourself. You won’t keep up with tactics that you find painful, and founders will sense your discomfort. In my case, I’m an introvert and I don’t like going to post-work networking events, but I love writing (case in point: this post).
Deal flow tactics and tips
Focus on the first three below.
• Back the people in your network who are the most talented, no matter what they’re doing. There’s no substitute for having firsthand knowledge and experience with people and knowing that they’re rare. Like we talked about in part 1, the biggest driver of whether a startup succeeds is the people who found it. Always support the best ones. They have the highest odds of making a business work.
• Second-order effects: back your best people’s best people. The next best thing to having primary knowledge of a founder’s excellence is hearing about it from someone you trust. You can extent this network of references to third and fourth-order effects, but the further away you get from people you know and believe in, the less value these recommendations have.
• Don’t change what you’re doing. This is kind of an anti-tip, but your career and personal choices should already yield deal flow. The best way to get it is to continue to excel at what you already do. It isn’t sustainable to change your whole lifestyle to try to get deal flow. Not having any by now isn’t a great sign.
• Be a subject-matter expert in one or more industries. People building companies in those industries will reach out to you, especially the more well-known you are. A few ways you can cultivate and communicate your expertise: blog, podcast, be a source to journalists and do press, write a book, speak on panels, give talks, read industry journals, teach a class, do and publish research, get an advanced academic degree, or work at a company focused on the topic, or found a company in the space that does well.
• Be an expert in your role — e.g., one of the top product people in Boston. Up and coming product people will come to you for advice, advisor positions, speaking engagements, and more.
• Build or join a community. It’s better to build it, but only if you commit to keeping it active. If you’re joining, you need to be an active participant. It should include potential founders who you can imagine backing, and targets an area that you are legitimately passionate about. Start a meetup, an event, a subreddit, a petition, a competition, a hackathon, a party, an online forum, a twitter chat, or an Instagram hashtag.
• Make a list of the people who most impress you in your city, industry, and/or role. Send them a personalized, thoughtful invitation to buy them coffee or do a quick phone call to get their advice on angel investing and get recommendations on the most talented people they know. If the meeting goes well and you feel a connection to that person, ask for intros to their talented people. Appreciate that they are extremely busy and keep these meetings short.
• Go to social/networking events and commit to being productive there. If you can get a guest list beforehand, find the several people who you think will be most valuable for you to meet and seek them out. Have real conversations with them as humans, not just about business. Don’t just schmooze and talk to whoever comes up to you; often they’re not the ones who will add value to your investing goal.
• Go to conferences on industry topics that interest you. If you can get a speaker slot, even better.
• Build a storefront for your personal brand that tells people who you are, what you’re looking for, what excites you, and how they can contact you. Often this is a website with your name as the domain, but it can be anything you’re comfortable with that’s true to your personality. Common examples of storefronts: a Medium blog, a personal website, an active Github or twitter presence, an entrepreneur in residence (EIR) status at a VC firm, a contributed author profile for a publication like TechCrunch or Forbes, your LinkedIn profile, or your AngelList profile (especially if it highlights past investments).
Lastly, deal flow begets deal flow. Although you will pass on 99% of the companies you meet, you should be helpful and personable anyway and the founders will appreciate and remember you.
Next up: evaluating founders (and red flags) in part 5. Questions or comments? I’m sarah(at)accomplice(dot)co and @SarahADowney on twitter.