How to Become An Angel Investor: 10 Tips From an SMB Technology Media Entrepreneur

Poke around the SMB and MSP technology markets, and you’ll find numerous entrepreneurs who are now angel investors. Examples include:

Photo Caption: David Bellini, Gary Pica, Adam Slutskin & Zak Karsan

But how do you transform (or extend) from SMB technology entrepreneur to angel investor? My own journey toward angel investing started in 2014, gained traction in 2019, and is now shifting into overdrive. I’ve shared some highlights, lowlights and tips below to help you consider the pros, cons and potential first steps toward angel investing in the SMB technology market.

Please Note: This blog is NOT designed to offer you investment advice. Instead, it provides a decade or so of learnings in one tip sheet that may (or may not) help you to frame your own journey toward angel investing.

How to Become An Angel Investor: 10 Tips for Technology Entrepreneurs

1. Check the Definition: You don’t need to get certified or pass a test to become an an accredited angel investor. Instead, you simply need to fulfill certain financial criteria. The U.S. Securities and Exchange Commission (SEC) defines an "accredited investor" as someone with a net worth of $1 million in assets or more (excluding personal residences), or having earned $200,000 in income in each of the previous two years, or having a combined income of $300k for married couples, according to Investopia. Those words suggest you may have the financial means to become an angel investor. But those numbers alone should not determine if you take the journey.

Tip: Get your financial house in order (monthly bills, cash flow, debt, etc.), and make sure you truly have the financial means for a long-term angel journey.

2. Understand the Risk and Assume Failure: Each time you write a check to fund a startup you should assume that you will never see that money again. Why? Because 30% to 40% of your angel investments will result in a total loss, according to Returns to Angels in Groups (2007, Robert Wiltbank).

Tip: If you couldn’t stomach Wall Street’s losses in 2022, then you probably can’t stomach potential angel investment losses.

3. Mitigate Risk and Maximize Potential Upside By Diversifying: To mitigate risk and find “winners” that more than offset your “losers”, you need to master four things: Diversification, due diligence, engagement and good record keeping, according to Wiltbank.

Tip: Figure out how to invest in 20 different startups, so that your potential winners can potentially outpace your potential losers. But:

  • How do you build deal flow, navigate due diligence, and find startups worthy of your money?

  • And how much money should you allocate for angel investing?

Tips 4, 5 and 6 below offer some perspectives.

4. Finding Potential Investments, Part One - Start Local, Listen and Learn: My first step toward angel investing arrived in 2014. My former business partner (Amy Katz) and I had sold and exited Nine Lines Media Inc. (the parent of MSPmentor, The VAR Guy and Talkin’ Cloud) to Penton Media (now owned by Informa). I lived near New York City, and stayed in close touch with numerous industry sources. One of those key sources, former Intronis CEO Sam Gutmann (now CEO of OwnBackup), had joined Golden Seeds — an angel investor group in Manhattan.

Photo Caption: Sam Gutmann

In my case, Golden Seeds allowed me to learn the ropes of angel investing in my own back yard — without having to travel to tech hubs like Silicon Valley; Austin, Texas, and so on. The group’s 340+ members and associated venture funds have invested over $165 million in over 225 exciting women-led companies, according to the Golden Seeds website.

Unlike the famed Shark Tank TV show — where deals seemingly happen within minutes — the Golden Seeds membership allowed me to see and hear the extensive due diligence work that angels perform during extensive engagements with entrepreneurs.

Frankly, I was blown away by the Golden Seeds team. Still, the group wasn’t a perfect fit for my focus and long-term angel investment goals. For starters, many of the deals involved vertical markets in which I had little or no experience. Further complicating matters, each potential deal typically involved writing a check that was potentially beyond my financial means at the time.

Tip: Search the Angel Capital Association for local or vertical angel groups that may align with your interests.

5. Finding Potential Investments, Part Two - Skate to Where the Puck Is Going: I spent a year as a Golden Seeds member (2014) and learned the basics of angel investing — the nuts and bolts of it all. But by 2015, entrepreneurship was calling again. Amy Katz and I were back in business together, this time building After Nines Inc, which ultimately launched the ChannelE2E (2015) and MSSP Alert (2017) media sites. Once those sites gained critical mass, I took a second separate look at angel investing around the 2019 timeframe. That occasional angel focus, to be clear, was a hobby outside of my day job.

Tip: Figure out where you may retire or move next, and look for local groups there. In my case, I was living in New York in 2019. But for a range of reasons, I realized that my wife and I may someday retire to Florida. So, I poked around the Florida angel investor scene and got a lucky break: I stumbled onto Florida Funders, a venture capital firm that also runs an angel investor network. Florida Funders provided several benefits that fit my needs:

  • Initial due diligence: The group vets startups — vision, management, product market fit, burn rate, etc. — to ensure angels like me have deep info before deciding whether or not to write a check.

  • Deal flow: Instead of “finding” potential investments on my own, Florida Funders presented vetted opportunities to me and other angels.

  • Familiar vertical markets: The group’s founders have deep technology expertise, including plenty of experience building VAR (Value-Added Reseller) businesses.

  • Familiar Faces: While at Florida Funders, I quickly connected with industry friends such as TimeZest CEO Gerwai Todd — a fellow angel who previously focused on M&A for ConnectWise.

6. Understand Your Long-Term Angel Investment Finances & Goals: So, how much should you commit to angel investing?

Tip: For some guidance, I recommend books like Angel (by Jason Calacanis) and Angel Investing (by David S. Rose). Some folks tap 10% to 20% of their net worth (not including the value of your residences) for angel investing. After reading both both books and carefully studying our finances, my wife and I arrived at a comfortable number for our angel investing strategy: We’d gradually commit 5% of our net worth to angel investments. And our target portfolio would eventually span 20 startups. Once we reached those two financial goes, we’d re-assess the situation.

Bonus Critical Tip: Have a true heart-to-heart with your spouse/significant other. Make sure you both truly understand your current net worth, near- and long-term financial needs, and how much you’re truly willing to allocate to startups that could ultimately fail.

7. Network Even More: By joining Florida Funders in 2019, I quickly gained access to deal flow and investments that appeared worthwhile. Within a year, I had made a handful of investments. But I didn’t stop there. Through online research and conversations with multiple sources, I pulled together an informal angel investor meeting at the IT Nation 2019 conference. The confidential meeting involved:

  • Pipeline-building ideas;

  • Perspectives on key IT sectors — where the smart money is (and isn’t) flowing;

  • Companies that may be looking for seed and Series A investments in 2020; and

  • Plenty more.

My longtime friend, ConnetWise veteran and peer angel Gerwai Todd (now CEO of TimeZest) attended. Also in the house: Kevin Blake, CEO of a ICS — a fast-growing MSP in the Binghamton, New York area. I also stayed in touch with Lloyd Wolf, the former CEO of Wolf Consulting — a leading MSP in the Pittsburgh, Pennsylvania that Evergreen Services Group acquired. By mid-2020, the four of us were speaking pretty regularly. And we made our first angel investment together. Much like a band whose members also work on solo projects, the four of us also made various angel investments of our own. Together, we dove into online communities like Angel List to see what deals might await us there. In my own case, I expanded to Propel(x) to find STEM investments such as Brelyon.

Caption: The first Channel Angels investors - Kevin Blake, Gerwai Todd, Lloyd Wolf & Joe Panettieri

Tip: Move beyond your comfort zone and network with angels outside of the trade shows and online sites that you already know.

8. Invest In What You Know: During that first Angel Investor meeting at the IT Nation conference in 2019, Gerwai Todd noticed a challenge: The conversation wandered a bit. To move forward, we each needed a clearer investment thesis and focus, he noted. In my case, I was receiving unsolicited offers to invest biotech, medical tech and crypto currency startups. The areas were growing fast and heavily hyped — but I had no real knowledge of those markets.

Tips:

  • “Never invest in a business you cannot understand.” – Warren Buffett

  • “Never invest in an idea you can’t illustrate with a crayon. — Peter Lynch

So, what did I have in common with Gerwai Todd, Kevin Blake, Lloyd Wolf and other angel investors who had my attention? The short answer involved SMB technology — sold to and through MSPs. To be clear, I did not want to invest in IT services businesses (MSPs and MSSPs). Instead, the common target among all of us involved cloud software and SaaS solutions that allowed MSPs and their SMB customers to scale and protect their businesses. I ultimately launched Channel Angels in January 2020 to document that focus and my angel investing journey, while sharing additional views from principal investors such as Gerwai Todd and Kevin Blake.

Still, the 2020 debut of Channel Angels essentially was a soft launch. The site was an occasional hobby. My full-time job and plenty of overtime through December 2022 involved co-building ChannelE2E and MSSP Alert. But on some nights and weekends, I connected with Gerwai, Kevin, Lloyd and other angels. We compared notes, and I further expanded my angel investments directly and via platforms like Florida Funders, Angel List and Propel(x).

9. Reassess Quarterly and Annually: To recap, I began my angel investing journey in 2014. Plenty has changed since that time. Two of my sons have graduated from college. My youngest son will head to college in the fall of 2023. And over the past nine years or so, my financial picture has changed in multiple ways.

Tip: Don’t over-commit your money to angel investing. Once you put your money into a startup, you don’t know if or when you’ll get it out. Before writing your first or next check to fund a startup, make sure your personal finances are property padded to withstand a recession, job loss, stock market correction or some other catastrophic event.

10. Think Long Term: One investment does not make you an angel. Instead, it makes you a gambler. Leveraging the tips above, and figure how much of your net worth you can comfortably assign to angel investing. Then, network with the right people and groups to gradually build out a diversified portfolio of investments.

Tip: Got more questions about angel investing? Feel free to email me: Joe@ChannelAngels.com. Thanks in advance your your inquiries. Also, reach out to the sources above. All of the hyperlinks lead to their LinkedIn pages.

Observation: I realize all of the angel investors pictured above are men, and most are middle-aged white guys. Want to help us further diversity in the angel investor sector and at Channel Angels? Then please join us. We welcome accredited angel investors from all backgrounds.

Angel InvestingJoe PanettieriConnectWise, CyberFox, David Bellini, Gary Pica, Adam Slutskin, Vault America, Zak Karsan, TruMethods, Amy Katz, Sam Gutmann, OwnBackup, Florida Funders, TimeZest, Gerwai Todd, Angel, Jason Calacanis, David S Ross, Kevin Blake, ICS, Wolf Consulting, Lloyd Wolf, Brelyon1 Comment