In November 2021, OSlash announced a $2.5 million pre-seed round led by Accel. This was followed by our post-seed round to the tune of $5 million in March 2022.
The rounds saw participation from more than 50 angel investors and operators — the who’s who of business and technology — including Dylan Field (Figma), Akshay Kothari (Notion), Girish Mathrubootham (Freshworks), Olivier Pomel (Datadog), Nicolas Dessaigne (Algolia), Christian Oestlien (YouTube), Kunal Shah (CRED), and Cristina Cordova (First Round), among others.
How did we pull this off?
I put this guide together to answer exactly that question and to make the process of raising an angel round more transparent and easier to understand. I know what a struggle it can be to navigate obscure logistical and legal processes involved in fundraising. The lack of actionable resources for first-time founders only compounds the problem. This is a small attempt from me to solve it for you.
Unlike institutional investors such as Venture Capital (VCs), angels are individuals who take an interest in the startup at a very early stage, when the risks are still high and the fate of the startup is largely undecided. They can be the most crucial source of not just funding, but also provide an ecosystem of social and informational capital that helps a startup thrive.
If you are an early-stage founder looking to leverage the strengths of angels for your venture, this guide can prove extremely useful to you.
It comes with lessons from my personal, hands-on experience. Having conducted multiple private and group sessions for founders and VCs on how to structure a successful angel round prompted me to pen it all down for easy reference.
Let’s dive in!
What is covered in this guide?
Think of this guide as the ultimate playbook for raising money from angel investors. It will help you understand:
- Who are angel investors and how they can support your business
- How to set goals and structure a successful angel round
- How to reach out to angels
- What collaterals to prepare for your round
- How to close your round
What inspired this guide?
Fundraising is a double-edged sword for a startup founder.
On the one hand, it is everything you detest — tedious processes, heaps of paperwork, red tape, and bureaucracy. It eats up time you could be investing more fruitfully in building products, conducting market research, talking to your users, and scaling your business.
On the other hand, it is indispensable if you want to grow. The angel investors you get on your cap table will not just provide finances, but also lend a helping hand as you build your business from the ground up. I wrote this guide to clear the many misconceptions founders have when they think about raising an angel round.
Who is this guide for?
- This guide is for founders of technology companies, who are currently raising their seed round and would like to have angel investors participate or lead the round
- This guide will discuss in-depth how companies can raise a successful angel round from multiple angel investors
Who are angels and how can they help?
Ever wondered why they are called angels and not simply investors? It is because they bring in so much more than cash. They bring in kindness. They are ready to believe in your dream when few others do. And they are ready to put their money where their mouths are. They are your staunch supporters who want your business to succeed as much as you want it.
And how can they help? Well, most angels are themselves successful entrepreneurs, business leaders, innovators, and visionaries who want to help make the world a better place and give back to the community that supported and mentored them in need. They do this by:
- Backing your idea with much-needed finance
- Capitalizing on their vast networks and introducing you to the right connections. These could be additional investors, technical or business mentors, and coaches, great candidates you could hire, or even early customers for your pilots
- Providing a wealth of industry-specific knowledge and know-how gathered and embellished from years of personal and/or second-hand experience, especially if you are building a venture in a very regulated or vertical business
- Cheerleading you and lending crucial moral support and encouragement when plans go awry and you need to do some rethinking, make some adjustments, and pivot
Types of angel investors
There are different kinds of angel investors you can have on board, in order to maximize the utility and benefits you derive out of your angel round.
1. Fellow founders:
- They are angels who have built their own companies, often from scratch, going through each stage of the complex process. They can guide you through every aspect of founding a business and can be mentors and coaches to you
- Since they have faced similar challenges and navigated similar journeys, they are well-qualified to dispense relevant and actionable advice for your company. They can share the best playbook from their journey
- The only thing to keep in mind is that if they are very successful founders, they will not be able to dedicate too much time and energy to your company
- Ex - Dylan Field, CEO of Figma or Girish Mathrubootham, CEO of Freshworks.
2. Super angels:
- Also called archangels, super angels are extremely active investors who have a huge network of executives and advisors
- They have a knack for making money from their well-researched and often commercially successful investments in hundreds of companies
- Ex - Naval Ravikant, Brianne Kimmel
3. Domain experts:
- Angels, who can double up as domain experts, can be a valuable resource for know-how when you are building a deep tech company or going after a vertical industry such as healthcare, insurance, or construction
- There are some investors who have deep domain expertise in certain markets, such as NFX. The entire founding team is that of operators who have built and run marketplaces companies
- Ex - Lenny Rachitsky, Balaji S.
4. Operator angels:
- They are senior executives in the business such as product, engineering, or marketing leaders. It can be VP Engineering at a big tech company or a Marketing Director at a consumer goods conglomerate
- Ex - Shreyas Doshi, Cristina Cordova
What do angel investors look for in a startup?
Angel investors primarily look for a sweet spot based on many factors before investing in a startup. These include the nature of the business & the market, the founding team’s experience & expertise, and of course, the potential returns on their investment.
Here are a few criteria a startup should fulfill before approaching angel investors:
1. A strong management team: The first thing which any investor, angel or VC, looks for in the startup is the management team. Is the team passionate about the problem? How do the founding members know each other? How long have they been working on this problem? Is the leadership strong, adaptable, observant, and trustworthy? Qualities such as integrity, clarity of strategy and approach, professionalism, determination, self-belief, and belief in the venture are important to angel investors.
There are a lot of examples where the team has started with a product and has pivoted to something else, Twitter being one of the most famous ones. It started off as a messaging service before Jack Dorsey and team pivoted to Twitter.
2. A large market size: The second thing they look for is if the market is large enough. If it is, they know that there are going to be multiple companies, which will go after this market and someone is going to win. A good example is the food delivery business. People are going to order food.
But this is particularly relevant when angels are investing in a technical product, which may not be exactly like a consumer product, for which everyone just knows there's a market.
3. A convincing business plan: Angel investors will exercise due diligence and invest in only if they are convinced by the complete business plan, including analysis of the target market including competitors, financial projections, marketing plans, and other specifics. They want to see a fully sketched out vision that details the plans for blistering the growth and competitiveness of the company.
4. A problem they can relate to: If you are trying to solve a problem that angels have themselves experienced or one that they relate to, it serves like validation for them to invest in the startup.
5. A viable exit strategy: Since angels take considerable risk while investing in a startup, they expect manifold returns. One way in which they assess their potential returns is by evaluating the exit strategies available to them. They will expect a comprehensive analysis of their payout and their risk in each scenario.
How to raise a seed round with angel investors?
The key to raising a pre-seed or seed round with angel investors is knowing that angel investing is all about building trust and long-term relationships. This may be easier in person but post the pandemic, it has also become common to approach angels virtually. Angel investment networks and groups also exist.
After finding potential investors, you can set up a time to meet with them and present your pitch. Your pitch should be clear and impactful and give them a reasonable idea of your business. If an angel is convinced, they may conduct further due diligence and vet your business plan, financial statements, and the like, and offer you a deal.
Below is a step-by-step breakdown of how you can structure a successful angel round.
But before that, I want to clarify the difference between seed investment and angel investment.
Seed investment vs. angel investment — the difference
Seed money, as the name suggests, is money raised by a company in its very initial stages. It typically involves small amounts, enough to take care of a business’ essential operational needs. Seed finance enables companies to attract more financing to grow and scale themselves.
Seed money can come from a variety of sources, such as close friends and family of the founding team, crowdfunding, startup incubators & accelerator institutions, and private investors including angel investors, and venture capital (VC) funding. So, angel investment is a subset of seed investment.
How to structure your angel investment deals?
For a successful angel round, I will break down the process of fundraising into four steps:
- Goal: Planning how much money you want to raise and from whom
- Outreach: Creating a lead pipeline and networking
- Preparation: Creating collaterals such as an elevator pitch, investment memo, company deck, and product demo
- Closure: Creating a legal structure to collect cheques from multiple angel investors
How much to raise?
If you already have a lead investor and are planning to raise money from a number of small investors, I recommend keeping at least 10 to 15% allocated to angel investors. While negotiating with your lead investor, please mention at the outset that at least 10 to 15 % would be allocated to angels.
In OSlash, we kept a 20% allocation for angels, and our lead VC firm, Accel, was completely on board with the idea. They even introduced us to some angels.
From whom to raise?
Angel Investing can happen in two ways — where angels themselves are leading the round (also called Party Round) or you have a VC firm leading the round and angels participating in that round. If you already have a name VC firm leading you around, you would like to get a few angels to participate.
- If you are working on a dev project, it will help to have founders of companies such as Vercel, Github or Stack Overflow on your cap table as they have already built an audience around developers
- If you are building a consumer tech company, try to get founders of companies such as Instagram, Bumble, Calm and others, who will be good for your cap table
2. Reach Out Investors - Outreach
i. At the outreach stage, you should create a long list of potential angels who could participate in your angel round.
ii. Your list should have a combination of:
- successful founders in your category
- leading operators who can help you build the engineering, product, or marketing functions
- super angels who can open more doors for future fundraising
iii. I recommend putting together a list of 100 to 150 angels.
- If you don’t know where to start, we have created a list of the most prolific angels, which we would love to send to you.
- Send personalized emails to these angels and ask for warm introductions. Follow them on Twitter and if their DMs are open, don’t hesitate to send them your elevator pitch.
You have to lay the groundwork for your potential angels and present them with all the necessary information they need to make a sound investment decision.
After all, an angel is an individual, not an institution. They will be investing their hard-earned money and their trust into your business for a high-risk high-return proposition. Raising money is an exercise in trust-building.
Getting their support will be far easier if you do the following religiously, provide full disclosure in the investment documents, and cover all your bases properly.
You have to work on four major preparation collaterals:
i. Elevator or email pitch
ii. Investment memo
iv. Product demo
i. Elevator Pitch
Write a short blurb about the business. Introduce the company, the problem, and the value proposition or solution you propose with its potential benefits.
Keep it concise (so much so that you can explain it in 30 seconds to one minute).
Here is ours, for example: At OSlash, we are building an all-in-one enterprise URL manager that lets you name, structure, access, and organize long workplace links by converting them into human-readable shortcuts. This simplifies and speeds up information-sharing, productivity, and collaboration for you and your team.
ii. Investment Memo
Expand on the blurb by writing a comprehensive investment memo.
This will be the main document that outlines the key components of the business and presents the case and rationale for investors to put their money into it. Express all the crucial information about the business but also keep it simple.
Here is a draft template you can use:
- Introduction: This should detail:
a. What you do
b. The problem you intend to solve
c. The proposed solution
d. The business model/how the solution will make you money
e. The scale of the opportunity
- Metrics: Highlight in numbers, charts, and graphs:
a. The traction up to now (include a chart)
b. Revenue drivers
c. What go-to-market looks like
- Challenges to growth: Mention:
a. The obstacles hindering you from growing faster
b. How raising money can help overcome the problem
- Market: Define:
a. Your target customers and ICP
b. The thinking patterns and behavior of your ideal customer
c. The scope of the opportunity your target market presents
- Competitive Landscape: Answer how you plan to take on and beat the competitors
- Team: Explain the unique strengths and opportunities your team brings with it
- Use of funds: Elaborate on how much you plan to raise, from whom, and what you plan to do with it
Try to explain the business and why the timing is right for the venture. It’s extremely important to draft a good business memo. The memo is your source of truth for all follow on investment materials that you are going to create in the company.
Here are a couple of good investment memos which are public:
Create a full presentation based on your investment memo.
Your deck is a visual and succinct representation of your memo. Keep the number of slides limited and focus only on meaningful data without being too detailed.
Tailor your deck according to the audience; do a little research before you pitch and get to know the people you’ll be pitching to better.
One of the best guides we have found online on how to pitch decks is by Reid Hoffman - LinkedIn Deck pitch to Greylock Partners
iv. Product Demo
- Remember raising funds is an exercise in trust-building. Since it is impractical to meet all the angels because of location and COVID norms, founders have to get more creative and go the digital way for fundraising.
- You can easily make a Loom video of the product or create an early self-sign version for your angels to try out.
- At OSlash, we ended up doing both - we made a Loom video with the signup link for the product. You can find the OSlash demo here
- If you want to learn how to create a compelling product demo, here’s a Twitter thread I wrote on this.
We are now moving to the final stages of collecting the cheque and closing the round.
This is where things usually get complicated. I have seen founders spending a lot of time here and experiencing frustration.
Perils of an angel round
Although having a lot of angels is extremely beneficial for your company, managing all of them is cumbersome:
- Your cap table will get very messy: Early-stage founders don’t realize how difficult it is to maintain a cap table. When you are starting out, you will have only a few line items such as a Lead-VC, founders, and employees. But, as you start adding angels and future investors, the number starts becoming larger. You will have to invest in Cap Table Management software such as Carta or Pulley.
- Legally expensive: If your lawyers need to create separate legal documents for every angel, your legal fees will end up going through the roof. In future rounds, your legal cost will rise further due to a messy cap table. Late-stage investors will be disappointed as more due diligence will be required.
- Chasing signatures and wire transfers: You will need signatures from each angel whenever you are raising a new round. Moreover, you will have to keep track of every wire that has reached your bank account and keep all your angels updated accordingly.
Fortunately, there is an easy way out of all this. Our friends at AngelList have come up with a brilliant solution - the AngelList Roll-up Vehicle.
AngelList Roll-up Vehicle
- Roll-up Vehicles (RUV) are a special-purpose entity set up to create a single holding company for all your angels.
- You can get all the investors to invest via a single entity - without bringing them individually into your Cap Table.
- Upto 250 angels can invest via a single RUV.
- As a founder, you get a neat dashboard where you can track all the investments and stages of wire transfers directly into the company.
- Your investors can directly transfer the money using the ACH payment mode and also save the cost of wire transactions.
- It is as simple as sharing a link with all your investors.
- Once angels transfer the money to AngelList, the latter will take care of all legal formalities and wire the money to your company account, once the round is closed.
- The best part? RUV is private. Only people with the invite links can invest in RUV.
Now that you know how to raise a successful angel investment round for your startup, it may be worthwhile to point out that fundraising is often an ongoing battle and not a one-time affair.
As a founder, your goal should be to close the round as fast as possible so that you can go back to doing what you know and do best - building your company.
I hope that this guide can help you get one step closer to doing that with more awareness, simplicity, and ease of mind.
If you have any questions, you can always reach out to me at firstname.lastname@example.org and I’d be more than happy to help.
1. When is the right time to raise money? How do I know when my business is eligible for an angel round?
The right time to raise money is when you have discovered product market fit. Generally speaking, a business can survive in the long run only when there are people who will buy what it sells. So there should be demand for your product or service and people should be willing to pay for it.
But even before that the question to ask is whether the business even needs angel money? Whenever we think of raising private money or raising money from investors, we have to keep in mind that the business must scale and provide an exit to existing investors. If you're thinking of building a large business, which you believe can scale and go public someday, and will make money for people who are investing in it, then it may be right to go for angel investment. When you know that the business is eligible, make sure you have some understanding of where the customers are going to come from. Because only then will the business succeed and scale, and make money for private investors.
In conclusion, the moment you reach some level of product market fit, you should look at raising some angel money.
2. How do angel investors differ from a VC?
There are four major differences between angel investors and VCs:
a. Cheque size - Angels don't invest as much as VCs. While VCs can invest anything from $500,000 all the way to $500 million, the usual upper limit for angels is $100,000. And they can also invest as low as $1000.
b. Structure - Angels are generally individuals (can also form angel groups to come together and invest). But VCs are structured as a firm.
c. Source of the funds - VCs raise money from large banks, pension funds, universities etc. to deploy into startups. Angels usually invest their own money. But, nowadays you also have angels who raise money to invest in companies.
d. Engagement level - With a VC, because of the firm structure, you have different engagement levels. You have analysts, associates, and partners who would actually be on the board and engage with you. Unless a VC firm has said yes to an investment, a partner is not going to be involved in the business. But, an angel is investing alone. They are trying to help you. They are trying to work with you so they will be personally involved from day one.
3. Should I negotiate with an angel? How do I best prepare for negotiations?
a. In most cases, you won’t need to negotiate with an angel because angels are extremely founder-friendly. In fact, you should watch out for angels who try to back you into a corner and reconsider engaging with them. Most angels would try to accommodate whatever your needs are. In my experience, they want to make sure they do right by the founders.
b. In some cases, however, you might have to negotiate, especially where they are asking for a larger allocation in the business that you can’t comply with. For example, you're raising a $2 million round out of which only $200,000 is reserved for angels. And you have an angel who wants a $50,000 allocation (that is 25% of your allocation) that you can't allow. You might have to ask them to reduce it to a $20,000 allocation. In such cases, you need to be very upfront with them and make sure that you give them some upside in the later rounds.
c. In addition, there can be one peculiar situation where you may have to negotiate. Let's say if the valuation of the company is not defined and angels are coming together in the round, you can ask the lead angel to come up with a good valuation for the company, or come up with one yourself. And if they are negotiating, try to understand where they are coming from. Also keep in mind, angels are investing their own money. So you, too, don't want to be very greedy with the valuation.
4. My collateral contains everything about my business. How do I protect the confidentiality of my idea?
a. As I said before, angel fundraising is an exercise in trust-building and it works both ways. If an angel is already investing in your startup, they have a vested interest to make sure all your rights are protected.
b. But in some cases you will come across situations where they may try to show the collateral to another company especially when they might have an investment in a competitor company. To avoid that, try to clarify these things right on the first call with the angel.
c. You can create authentication protocols for accessing the information. At OSlash, we kept our collateral on Notion and shared access only when the angel requested it. Or you can use something like DocSend where your deck can be shared only via email access. But a lot of this depends on trust. You do want to make sure the detailed numbers don't go out, but for the memo and deck, try to make sure access is authenticated. Make it fail safe.
5. How expensive is it to raise an angel round? What are the major costs and fees involved?
a. It was expensive to raise an angel round back in the day. Say if you're trying to get 20-30 angels, you have to bring them all onto your cap table. There’s the legal cost of paperwork. You have to follow up with them to coordinate wire transfers - make sure they send the right banking information, collect the cheques, and more. For us, it was not just legally expensive but also cost a lot of time.
b. Thankfully, a few firms like AngelList came up with a special purpose vehicle where all of these angels can come together as one structured firm and the firm can invest as a single entity in the cap table. And that used to cost $8,000 - all that was required for a successful angel round.
c. Now, with AngelList RUV, things have become even easier. Plus, if a company is incorporated in Delaware and you are raising SAFEs or equity, they offer a no-fee RUV. There is zero cost attached to it. Most software companies incorporated in the US are Delaware incorporated, but if you're not a Delaware incorporation, the whole thing can be done at $2,500 which is still a pretty good deal.
6. What should I do if an angel refuses to invest in my startup? If a deal falls through?
If an angel says no to investing in a startup, that's completely okay! You have many out there, you know? Try to speak with more angels. And I think that should also be a goal. You should always aim higher. Try to get more angels than you need, because some of them might change their mind. After all, all of us are human. So it's not a big deal.