Insights From Angel Investors With An Entrepreneurial Background

One of the first signs of a maturing startup ecosystem is when successful founders start investing in the next generation of promising entrepreneurs. These founders-turned-funders are, like all investors, striving for returns commensurate with the risk they are taking but are also driven by a desire to give back.

“You feel compelled to give other people a chance, an opportunity which someone afforded to you at one stage in your life. I really believe that even the smartest entrepreneurs in the world – Steve Jobs, Sergey Brin, pick anyone – I promise you, at some stage in their journey, luck played a role; another angel investor played a role; another advisor played a role. So I think we have a duty to contribute. I’d like to see more entrepreneurs do it,” shares David Giampaolo, successful entrepreneur, investor and CEO of Pi Capital.

A liquidity event linked to their own company – be it an acquisition, IPO or a secondary – is often what enables founders to start investing. Once they become investors, having enough exit opportunities in their portfolio can further re-engage them, as Giampaolo highlights: “I feel strongly that venture funds who invest at a later stage also look to give angel investors an exit so that that ecosystem can continue to be fed. It’s very important that there’s a round trip: people invest, three to five years later, hopefully, they sell some of their stakes, and they reinvest. It becomes a flywheel.”

Having seen both sides of the ecosystem, these founders-turned-funders approach angel investing through a slightly different lens – one that can inspire other startup investors too.

What to look for in startup founders

Most investors value founders who are intelligent and resourceful and who they believe have the ability to lead and execute. There is also an appreciation for founders who have deep knowledge of their chosen industry, a big ambitious vision that’s often at odds with the status quo and a commitment to making it a reality.

Angel investors who’ve been founders themselves tend to have a better understanding of the journey other founders are about to embark on. This puts them in a good position to spot otherwise underrated founder traits.

“I think what is perhaps underrated for exceptional founders is an understanding of their personal growth trajectory and ability to grow further. No one is perfect, but there are some who strive to constantly improve themselves, and there are some who have reached a peak and do not strive for much more. Exceptional founders are constantly trying to improve themselves and those around them. When investing in founders, it is not always about what they have previously done, but rather predicting what they are about to do and whether they can grow and adapt to new and bigger challenges as well as to how the world changes,” expands Zehan Wang, former Co-founder and CTO of Twitter-acquired Magic Pony.

Marie Outtier, who co-founded and led Aiden.ai, also acquired by Twitter, adds: “I look for founders who have a contagious energy and can demonstrate deep knowledge of, one, the industry they chose and, two, of what it will take for them to win. It’s easy to tick the first box, the second one requires self-awareness – the most underrated trait that exceptional founders have.”

Beyond self-awareness and a growth mindset, these founders-turned-funders often look for entrepreneurs whose motivation goes beyond making money. “When someone pitches me and says they can sell this thing in two years, that usually spooks me. If you sold something in two years, you got lucky. I’m looking for someone who wants to build something. They’re not thinking about an exit. They’re thinking about creating,” says Giampaolo.

Given that venture investing is not about incremental steps and founders who are just trying to make something marginally better, investors are favoring out-of-the-box perspectives. “I like backing neurodiverse founders. So much innovation has happened by people who think radically differently. I like finding people whose brain isn’t wired the same as most and who also have a big vision to change or improve something that I personally find important,” stresses Chris Adelsbach, exited founder and active fintech investor. “I then look to see that the founder has a supportive team and co-founders who can execute on the vision.”

Heini Zachariassen, who founded Vivino, highlights courage as an often forgotten trait. It takes courage to start a company and it takes even more courage to make the difficult decisions that are required to build a great company. By contrast, “it is important that a founder can sell, can tell a great story and convince the people around the founder. The investors, the customers, the employees – they all need to be sold to. However, this ability is overrated in the sense that some people can only sell and tell a great story. That just isn’t going to fly, you need to have more depth than just the ability to tell the story.” For example, while no guarantee of success, Zachariassen singles out stamina as the one ingredient that founders can’t afford to miss. “I find that the people who don’t have it just don’t get through the hard times that always come in a startup’s life.”

Paul Forster, former CEO and Co-Founder of Indeed, thinks persistence is a trait that is both underrated and hard to evaluate: “The bar for success in founding and scaling a startup is probably much higher for this trait than others like creativity and intellect. John Bogle, the founder of the Vanguard funds, had a wonderful motto for founders: ‘press on, regardless’!”. Raffaela Rein, founder and investor focused on Web 3, NFTs and sustainability, agrees that the most underrated trait exceptional founders have is the persistence that comes from a single-minded need to make the startup work. “Building a startup is hard, there will be many obstacles on the way and it is less well-paid than a cushy job with a nice company. So unless a founder has this inner single-minded need to make it work, they might not have the persistence to see it through.”

Persistence should not lead to being unrealistic or to a lack of humility. “Yes, by definition, entrepreneurs need to be highly motivated, highly optimistic, highly confident. But there’s a fine line too. Are they ignorant? Are they arrogant? Do they think they have all the answers? If I had to pick one undervalued trait, I would say it’s the ability to be driven and tenacious, but also to be humble enough and smart enough to know when you’re wrong, and that you need to change or pivot,” summarizes Giampaolo.

What founders-turned-funders see that other investors might miss

Investors who’ve previously been founders are very much aware of the difficulties associated with building a company. How unbelievably hard it all is.“I think it is easier for an exited entrepreneur to gauge the feasibility of a business plan, in particular the timeline,” shares Guillaume Bouchard, exited entrepreneur, currently CEO and Co-founder of Checkstep. He thinks that what other investors might miss is a reality check.

“Luck plays a role, expenses always come in faster than revenue, and it’s very challenging to create a budget and a business plan with any degree of accuracy. You’re making guesses upon guesses. That’s why I ascribe limited value to a business plan and more value to cash flow, total addressable market, unique proposition, product-market fit,” expands Giampaolo. “I just find most entrepreneurs are unrealistic. Some of them are arrogant and whimsical, but others are just overly ambitious. And they don’t factor in black swan events or setbacks, so they don’t know what they don’t know. As an investor, and as a prior entrepreneur, I don’t like it when someone says it can’t go wrong, or we have no competition, or the sky’s the limit. There are always two sides to a coin. Having no sales will kill you. Having too much business can kill you too. I’ve seen good companies go bankrupt because of cash flow – not understanding the difference between sales, revenue and cash flow.”

Founders-turned-funders also pay attention to weak signals. In the first call she has with entrepreneurs, Outtier likes to ask: “Thinking of the next 18 months, what are you most afraid of?”. She never gets the same answer, and having been through it herself, she gets a sense of where the founder’s priorities and focus lie. “An investor without operational experience may have a framework of what a founder should or shouldn’t be focusing on, but cannot appreciate the nuances of a founder’s answer to that question.”

Because they viscerally understand the challenges and nuances of building a company, investors with entrepreneurial backgrounds can show more empathy. “If you’ve been a founder yourself, you’re able to empathize with founders, understand their perspective and have a chance of being a useful sounding board for them. Some great investors who have never been founders can also do this, but it’s not universal,” says Forster.

As an investor in over 20 startups, Outtier doesn’t always get asked to join rounds because she knows the industry of the startup – she has invested in drones, solar sails, CO2 recycling, cloud computing, agronomy, etc. – but because she built and exited a business in a high-risk environment. “I’m a resource for entrepreneurs when they hit a wall, and they turn to me for things they don’t always feel comfortable talking to institutional investors. It’s difficult to build empathy when you’ve never been exposed to so much risk in your life i.e. not paying yourself whilst pouring all of your savings and life into a project that has 9 chances out of 10 to fail in the first 2 years.” Bouchard stresses: “Being a good investor is also difficult, but so much easier in comparison (it is only a resource allocation problem, and investors are often financially stable).”

Former founders can also better understand the loneliness that comes with leading a startup. “As the saying goes, ‘it’s lonely at the top’. This is because leaders at big companies don’t have much of a peer group and they tend to be married to their job. It can be even worse for a founder at a startup. You have all the loneliness, but none of the financial stability. I see this. I’ve been in their shoes and I try to be a person they can call upon and rely upon,” shares Adelsbach.

Investors with entrepreneurial backgrounds tend to remember how important it is to have people who believe in you and keep you motivated. “Being a founder is hard and it often feels very lonely. The investor should be a positive force in motivating the founder in the right direction,” shares Zachariassen. “Investors who never built a company sometimes forget this. Most great founders are really hard on themselves, there is no need to beat them up even more than they already do.”

Having been on the other side of the table, founders who are now funders can, more generally, think back to their own interactions with investors – what they were looking for when fundraising – and model their own behavior as an investor on it.

“I was looking for people who have a passion for what we were building and who were believing in me as a founder. I disliked investors who thought they had to micromanage the founders or were distrustful towards them,” says Rein. “So unless I have full confidence in the founders I would not invest and I make sure they know they can ask for my help anytime, but I would not tell them how to do their jobs.”

Forster also highlights the importance of having investors who see the opportunity in a similar way to the founders and trust them to execute. “If they see the big picture like the founders do, they are more likely to participate in follow-on funding rounds and support the company through the hard times that most early-stage ventures encounter.” There is little doubt that alignment between investors and founders is key. “This is incredibly important, there is no point in working together if we want to build two different things. The second thing that relates very much to this is the ability to communicate and listen. When we have misalignment, can we find that alignment, do we respect each other enough to listen and actually change how we see and do things?” says Zachariassen.

Wang’s approach to interacting with entrepreneurs has also been informed by his time as a founder: “As an investor now, I would normally look to provide guidance and advice for startups if I can – generally trying to provide some additional value rather than just the money. The ability to move quickly and be responsive is also helpful behavior.”

What founders should consider before starting angel investing

The vast majority of founders-turned-funders I know encourage other founders to start angel investing: there’s the desire to give back and help others, the opportunity to expand their own perspective and be more plugged into the startup ecosystem and, of course, the potential for outsized financial returns. All of this is with the caveat that you should never invest what you can’t afford to lose. “It’s very difficult. You need a portfolio and you need to have a high-risk tolerance, many go wrong and many fail. You also have to remember that you’re, at best, in an advisory, non-executive capacity rather than executive capacity,” warns Giampaolo.

If you’re comfortable with the above, you should still start slowly, as Forster advises: “Get experience under your belt as an investor, which is very different from being a founder. It’ll help you avoid common mistakes like projecting what you’d do with an opportunity, instead of assessing the founding team who will actually be doing it. Also, the quality of your deal flow is likely to improve over time as you become known as an angel investor.” Zachariassen agrees that you should go slower and smaller than you might be tempted to in the beginning: “Angel investing is not easy and you need to train that muscle before you make too many investments. It is a really good idea to do fewer and smaller investments to begin with.”

Fortunately, the ticket size doesn’t often prove to be a barrier for founders who want to start angel investing as many companies are willing to accept lower minimums. “If you can provide good advice and share relevant experience, then many other startups would value that more than the money you put in,” highlights Wang.

Patience and pacing are important but so is working toward designing a strategy. “First of all, I encourage founders to start angel investing but suggest that they invest in what they know. They should try to provide mentorship to founders as well as capital. They should diversify across at least 20 companies and they should try to invest through a cycle. Some of the best opportunities will present themselves during down cycles,” details Adelsbach.

Finding the right groups of investors who have done it before and trying to understand their reasoning and decision-making can help accelerate learning but there are also lessons that new investors are bound to learn from their own experience. Bouchard shares some of the mistakes he believes he made: “1. Investing in founders who could become friends: friends are great, but it does not mean they are the best investment. I’m careful to try to avoid the biases of people thinking the same way as myself. 2. Investing too early: without market proof, I can invest at a low valuation, but this can take years to become a reality. 3. Investing in founders that are great at saving money, because this is often associated with reduced investment in technology.”

You can read more about what experienced angel investors wish they knew when they started here.

As for how to start, Outtier shares: “Write a one-pager of your investment thesis (size of tickets, industries, geographical regions, stages of development), tell your angels and VCs you are interested in getting started and share it with them. You’re all set to pay it forward!”