How to select your angel investors

I’ve seen a number of situations recently that are something like the following.  A VC firm signs a term sheet with an early stage company. Let’s say it’s a $2M round.  The VC and entrepreneurs decide to set aside $500K for small investors (individual investors or micro-VCs). Because it’s a “hot” deal, there is way more small investor interest than there is capacity (the round is “oversubscribed”), and the entrepreneur needs to decide which investors are in and which are out.

The most common mistake entrepreneurs make is to base their choice solely on the investors’ “celebrity” value (by “celebrity” I generally mean in the TechCrunch sense, not the People magazine sense).  Picking celebrity angels might help you get a little more buzz when you announce the financing and a few SUL tweets, but that’s about it.  A startup is a long trip — what you should care about is whether, through the ups and downs and after the buzz dies down, the investors will actually roll up their sleeves and help you.

That isn’t to say that being a celebrity and being helpful are mutually exclusive.  Ron Conway is a celebrity (in the startup world) and is one of the hardest working investors I know. But there are other celebrity investors who I’m a co-investor with in a few companies who literally don’t respond to the founder’s emails.  And these are successful companies where the founder sends them only occasional emails about really important issues.

The second biggest mistake is picking angels that benefit the lead VC.  A lot of times when VCs guide entrepreneurs to certain investors what they are really doing is “horse trading” – they want you to let in so and so, because so and so got them into another deal, or will help them get into future deals.

It’s also smart to pick a varied group of people.  If you want a few celebrities to create some buzz, fine.  You should also pick some people who are connectors – who can introduce you to key people when you need it (varying connectors by geography and industry can also be helpful).  Also very important are active entrepreneurs who can (and will) give you practical advice about hiring, product development, financing etc.

Finally, don’t spend too much time agonizing over this.  One particularly silly situation I was involved with was where the CTO had invited me to invest but then the CEO decided he wanted to put me through multiple interviews before he’d let me in.  He probably spent a day of his time deciding whether to give me some tiny fraction of the round. Eventually he dinged me because I wasn’t famous, but at that point I was frankly kind of relieved since the CEO seemed to have such a bad sense of how to prioritize his time.

Disclosure: This post is entirely self serving, as I consider myself a non-celebrity but hard working small investor.

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