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How angel investors behave differently outside of Silicon Valley

Background reading:

California, and particularly Silicon Valley, is its own world as far as early-stage startup investing goes. The reasons for that aren’t complicated: because so much of the “angel” money swirling around that ecosystem was made in tech, it is much more comfortable going back into tech; and therefore the risk tolerance of California angels is unique relative to the rest of the country. That, coupled with the very high volume and density of angel activity there, means that when entrepreneurs in, say, Texas, Colorado, or Florida speak of “angel investment” they are usually talking about people who think and behave very differently from the type of angel a Y Combinator startup would pursue.

This broader point – that entrepreneurs in smaller tech ecosystems encounter very different environments and expectations from what they might read about in TechCrunch or Hacker News – is why I created my Startup/VC law blog, Silicon Hills Lawyer, to provide “the rest” of the startup world’s entrepreneurs a resource with content relevant for their world.

But back to this point about angels. While the demo day attending, t-shirt and sneakers wearing, SAFE-signing kind of angels can certainly be found, many angels you’ll encounter in Texas don’t have tech backgrounds. They are often successful professionals and executives from industries like oil & gas, healthcare, law, or some other field where they made money. They’re interested in tech (clearly), and want to invest in high-potential startups, but their lack of deep “tech chops” means they are going to be much more conservative in how they judge an early-stage startup. To put it bluntly: non-SV angels typically want to see far more traction (de-risking) and evidence that there is a viable business, relative to a Silicon Valley angel, who might be more comfortable “betting” on team + vision.

So Texas angels want to see milestones… which means to get their money you need to have already built something and achieved some traction… which usually requires money. That’s tough, and it’s why the vast majority of successful entrepreneurs I encounter start out with some kind of “friends and family” (F&F) round. The definition of F&F is fairly flexible. Sometimes it’s actually family, or personal friends, of the entrepreneur. Other times it’s very high net worth people who are just closer to the entrepreneurs than an arms-length angel investor, perhaps through an alumni network. But, defined broadly, a typical Texas F&F round is $50-500k of money that is going into a startup at a point where, given the extremely high risk, most “angels” won’t fund. You might call an entrepreneur’s friends and family their most angelic of angels.

There are societal implications to this reality that it usually takes wealthy connections to build a viable startup. Yes, many entrepreneurs come from more comfortable backgrounds than your average person, which often subsidizes their risk-tolerance. That’s a fact, and you can’t hide it. But statistics aren’t destiny. I’ve seen plenty of entrepreneurs who, despite lacking pedigree, are able to hustle their way into early money. Accelerators can help here.

The fact is that, while successful founder teams come in all types of personalities, someone on the team needs to be able to network and sell. A comfortable background certainly helps, but it is certainly not irrational for angels to treat an entrepreneur’s ability to put together an early F&F round as a signal of their long-term ability to “sell” services to customers, jobs to employees, and shares to VCs. See: Why Startups Need Signals. 

Conclusion: any Texas entrepreneur pitching “angel investors” with little more than a pitch deck and idea will likely hit the cold reality that Texas is not Silicon Valley, and things work differently here. If you don’t have your own bootstrap funds, put together a friends and family round, and if you can’t, add someone to your team who can. Founders expecting Texas angels to be too angelic don’t get very far.

Sponsored Post. Contributor: Jose Ancer, Technology & Venture Capital Partner, Egan Nelson LLP