Once you have developed an investment thesis, you need to source investment opportunities to match that thesis.
The quality and quantity of the investment opportunities that you see is commonly referred to as deal flow. Building deal flow is important because making good investment decisions is reliant on you seeing many deals, and selecting the best among those to actually pursue.
You may see 100 deals, pursue 10 of those in more detail, and ultimately make just a single investment. And that is not necessarily an exaggeration. Some angels actually recommend a 100:1 ratio of deals looked at to deals completed. How do you do that if you’re not doing angel investing as a full-time job? This many deals may sound overwhelming, and building high quality deal flow is no easy task, but if you build the right system and network it can be easily done.
it’s important to note that it’s not the number of deals you see at the top of the funnel that really matters. What matters is that you meet with enough to get to a handful of great investments. We don’t recommend investing in the first thing you see, it’s easy to get excited about every deal, especially when you first start out. Seeing many deals will help give you perspective on which ones are the most attractive, and why.
There are many different ways that you can source deal flow as an angel investor, and you will likely have a mixture of inbound and outbound deal-flow. Inbound deals are companies that come to you directly, or that are introduced to you through your network. Good introductions usually come from other investors participating in a deal, or entrepreneurs you’ve already invested in, who know the type of company you are interested in.
Inbound deal flow can tend to provide the strongest leads and will increase as you build your reputation as an angel investor. Don’t worry if your inbound deal flow is small, it will grow over time, and as you build your reputation in the angel investing / venture capital / startup communities. Outbound deal flow are the investment opportunities that you actively seek out.
We will focus primarily on outbound deal flow in this module. Before we dive right into where you can find deals. It’s important that we first talk about 5 different ways that you can choose to invest as an angel.
1. Direct Investing: Invest directly in companies that you find as an individual angel, negotiating terms yourself, or you can follow on to a deal that is already in place.
2. Equity Crowdfunding: You can invest through equity crowdfunding platforms. Equity crowdfunding is the name given to the process whereby people (the “crowd”) invest in an unlisted company (a company that is not listed on a stock market) in exchange for shares in that company. Popular online equity crowdfunding platforms include AngelList, Portfolia, Seed Invest, and many others. These are platforms that publicly market deals, disclose how much is being raised and at what terms, to accredited investors.
3. Angel Groups or Networks: An angel group is a collection of accredited investors in a specific region or with a shared investment thesis who review deals and negotiate terms collectively. Oncecompanies are selected and terms are negotiated, members make individual investments directly into the company. Generally as a member of an angel group you do not have to participate in every deal the group chooses to do. In Canada, NACO (National Angel Capital Organization) is a great way to connect with Angel Groups or Networks in your region.
4. Syndicates: A group formed temporarily for the purpose of handling a large transaction that would be hard or impossible for the entities involved to handle individually. Syndication allows companies to pool their resources and share risks. Unlike angel groups where investment decisions are generally made by committee. Syndicates usually have a lead, a professional investor who sources the deals and makes the investment decisions, only after the fact requesting that members of the syndicate participate in the deal. Syndicates exist both on and offline, but online syndicates tend to be the most accessible. Platforms like AngelList allow you to follow the syndicate of a high profile investor, and invest a small amount in any deal they do. Similar to angel groups, as part of a syndicate you do not have to participate in every deal.
5. Investing in a Fund: Finally, you can choose to invest in a fund as a, rather than individually selecting your own deals. When you invest in a fund you are agreeing to have your investment managed by someone else, under their investment thesis, as part of a larger pool of money.
As you can see, while personal deal flow is needed to invest directly in startups, there are many ways you can piggy back off of the networks of other experienced investors as you get started, whether through an angel groups, syndicate,or as an investor in a fund.
That said you will still want to pursue some deal flow of your own. With your own deal flow you can choose to invest on your own, as a “lone wolf” or to contribute deals to any angel networks, syndicates or funds you are a part of.
There are many ways that you can create your own deal flow. On platforms like AngelList, there are thousands of deals that you can explore. Become actively engaged in networks like this, read the daily report on trending deals they provide, look at company pitch decks and deal terms and before long you will have seen hundreds of deals. Another great place to look for new companies online are platforms like Kickstarter and Product Hunt.
You can also attend startup pitch nights or demo days of local or global accelerators. The average accelerator graduates about 10 - 20 companies per cohort. Go to one of their demo days, and you’ll already have more than have the recommended deal flow to make your first investment.
Explore venture capital fund portfolio pages on their website, the Canadian Venture Capital Association website is a good place to start to get a better understanding of some of the Funds across Canada.
Developing inbound and outbound deal flow will be very important to your success as an angel investor.