Web3 Angel Investing

by Kate Rosenblatt

Read the prompt here.

This is a guide for beginners on how to diligence a web3 angel investment. It covers how to join an AngelList syndicate to source investment opportunities, criteria for selecting a syndicate, the top 5 criteria to diligence a web3 angel investment, and the top 3 questions you would ask for each of those 5 criteria.

How do you join an AngelList syndicate to source investment opportunities?

I heard about my first angel investing opportunity through Eve Wealth, the 1st wealth DAO helping womxn and non-binary leaders & invest in web3. Eve has an AngelList syndicate and shares deal flow opportunities for members. Joining Eve’s syndicate simplified the investing process. 

A syndicate is simply an investment vehicle that allows you, the backers, to invest in the lead investors’ deals. Lead investors are often experienced investors who are active in their field; their expertise serves as a valuable filter for backers when sourcing deals. Typically, joining a syndicate requires a personal connection or introduction to the lead investors but with platforms like AngelList, highly curated deals are more accessible than ever. Once you set up an Investor account, you can browse through and pick out the syndicates you would like to participate in. If the lead investors think you are a good fit then you’re all set!

To join a syndicate, you need to be an accredited investor.  To be qualified as an accredited investor, an angel investor needs to meet one of the following requirements:

Individual or joint net worth in excess of $1M (not including the value of a primary residence);  individual income in excess of $200k or joint income in excess of $300k for the two most recent years, with a reasonable expectation of reaching this level in the current year; holding a Series 7, 62, or 65 license. Once you confirm your qualification, you can search for syndicates on AngelList or find angel investing groups in your city.

Other criteria for selecting a syndicate

1. Experience – do the lead investors have the expertise required to understand this field? Will they be adding any value to the start-up and helping it steer the course?

Prior, in-depth knowledge of the sector boosts the credence of the lead investor and the start-up.

1. Propriety deal flow – by the time a startup reaches a wider audience of VCs and stock investors, you can be sure that the rate of return will have reduced for investors. It is, therefore, extremely important that the syndicate invests in the startup at early stages. If the lead investor has a penchant for such propriety deal flows, that is a big plus.
2. Past investments – find out the past investments have performed, and overall what is the syndicate’s rate of return, over a specific period.
3. Value system – key in choosing a syndicate is to ask yourself whether you identify with the value system that the syndicate stands for. At Eve Investing, creating a network of financially ambitious women and supporting planet positive web3 infrastructure are our guiding value beacons. Find syndicates that you feel passionate about!
4. Community – as within the world of web3, community plays an important role here as well. Does the syndicate have access to a community of like-minded investors that can assure capital? If yes, and if the network is one that you would want to be part of, that should be a powerful enough motivator for you to be an active member.

What are the top 5 criteria you would use to diligence a Web3 angel investment, and the top 3 questions to ask?

• Company founder(s) and team: do your research on the founder, their strengths, and their weaknesses. If you can, talk to investors or people who know them. Ask these questions:
• Who is the (co)founder, why are they the one(s) to build this company, and have they worked with their team before? 
• Are there clearly defined roles in the team (ask for an org chart), and can they execute and focus to grow the business successfully? 
• How do you plan to scale the team in the short term (now) and long term (12 months)? 

• Market: confirm the team has done their research and their company solves a  problem in the market. Ask these questions:

• Have you talked to your customers? What’s their feedback, and how have you incorporated this into your strategy? Who are your top customers and what is revenue by customer, as well as projected customers and projected revenue?
• How are you different from your competitors, and why are you building this now? 
• What is the total addressable market? Is this a brand new category?

• Marketing and product/market fit: you want to gauge if there is a strong product/market fit, consumer demand, and smart marketing spend. Ask these questions:

• What minimum marketing have you tested, and what are your proof points of success in demonstrating there is a high demand for your product/service (ie: is there a website and a waitlist, any press, and daily customer acquisition that actually pay for the product/service – don’t count free trial customers)
• What is your marketing strategy? (ie: consider content marketing/SEO strategy for organic search)
• What is your customer acquisition cost (CAC) and projected lifetime value (LTV)?

• Funds: depending on where this company is in their funding round, it’s important to understand their financials, their financial plan, and the overall potential. Ask these questions:

• Can I see your financial statements from the past few years? What are your financial projections for the next few years (including timing of products, cost structure, and projected growth rates and profitability)?
• How will you use these funds, how long will this funding last, and what is your timing for your next round?
• How much is being raised in this round, and how much have investors committed to (including any notable investors leading this funding round)?

• Evaluating the overall business opportunity: Understand the overall terms and details of this financing round, and any potential risks. Ask these questions:

• Is there a clear exit strategy – looking at the future and the projected ROI, what sort of return can you expect? Will the startup have potential to go public, thus leading to a higher valuation and return? What would that time frame look like?
• What are the biggest foreseeable risks, and how do you plan to work around them?
• Are there any legal or regulatory barriers that might prolong the launch or  eventual exit? (e.g. yet-to-be regulated products like autonomous cars or space travel, pending lawsuits against or by the company, any required trademarks, patents, or copyrights)

Angel investing is risky, as early stage startups have a high potential for failure. Consider your own risk tolerance, and what you would be willing to lose. Your first check when angel investing is usually not your last, so get clear on how much cash you can comfortably allocate. Personally, I’m a beginner when it comes to investing, and I recently wrote my first angel investment check, so no matter your background, if I can do it, you can do it, too.