One of the most common questions we get at the Angel Investing School is:

“Where can I find great entrepreneurs to invest in?”

Generating qualitative deal flow as a beginner angel investor in the UK can be daunting at first but building qualitative deal flow is the most important component if you want to become a prolific angel investor. Here’s a step-by-step guide along with examples of groups, syndicates, and communities in the UK that you can join to build out your deal flow:

Build Your Network

Networking is crucial in the startup ecosystem. Attend events, conferences, and meetups to connect with founders, fellow investors, and other stakeholders. Some examples of events and organizations include:

• Angel Investing School: When you join the Angel Investing School you get access to a vast network of diverse angel investors who operate in all types of industries.
• UK Business Angels Association (UKBAA): A national trade association that connects investors with startups and provides resources for angel investors.
• Tech events: Attend tech and startup-focused events like TechCrunch Disrupt, Startup Grind, or London Tech Week.
• London Angel Club: London Angel Club is a network that brings together angel investors and early-stage startups. They host events and provide networking opportunities.
• Angels in MedCity: This network focuses on connecting angel investors with life sciences and healthcare startups in the London and Southeast areas.
• Angels4Women: Angels4Women is a network that supports women entrepreneurs and angel investors. It offers events, workshops, and networking opportunities.
• StartupGrind: A global startup, investors and founders community. 
• FemaleFunders: Our mission is to increase diversity in the investment and tech ecosystems by empowering female leaders to become investors.

Above are only listed a few networks you can join to build out your deal flow. Make sure before joining a community or a network to define your investment thesis and criteria first so you can later join the right community, which will give you access to the right deal flow.

Online Platforms:

Leverage online platforms that connect investors with startups seeking funding. Some popular platforms include:

• Seedrs: A leading equity crowdfunding platform based in the UK that allows you to invest in startups online.
• Crowdcube: Another UK-based equity crowdfunding platform with a focus on early-stage startups.
• Angel Investment Network: We bring together businesses looking for investment and investors with the capital, contacts and knowledge to help them succeed.

Join Angel Groups and Syndicates:

Angel groups and syndicates pool resources and expertise to invest in startups collectively. There are numerous syndicates so make sure you identify and join the right ones based on your investment thesis, interests and experience. Examples include:

• Green Angel Syndicate: A syndicate that invests in companies whose radical grassroots innovations fight climate change.
• HERmesa: A community of angels who invest in female founders. 
• Alma Angels: Alma Angels is a unique investors community who are united by their passion to back ambitious women founders building tech-enabled, or IP-rich ventures
• Angels Den: A well-known angel network in the UK that connects startups with investors through pitching events and online platforms.
• SyndicateRoom: A platform that allows individual investors to co-invest alongside experienced angels.
• Science Angel Syndicate: We are a community of entrepreneurs and investors who source world-class scientific discoveries that impact society on a global scale.

Accelerators and Incubators

Many startup accelerators and incubators host demo days where startups pitch their ideas. Attend these events to discover potential investment opportunities.

• Y Combinator (YC) Demo Day London: Y Combinator, a renowned accelerator, often hosts demo days in London featuring startups from around the world.
• Techstars London: Techstars is a global accelerator that operates in London as well. They run a three-month program that culminates in a demo day where startups pitch to investors.
• Founders Factory: Founders Factory is both an accelerator and a venture studio that supports early-stage startups. They provide funding, resources, and expertise to help startups grow.
• Level39: Level39 is Europe’s largest technology accelerator space based in Canary Wharf, London. It focuses on fintech, cybersecurity, and smart city technology startups.
• London Tech Week: London Tech Week is an annual event that showcases the city’s technology ecosystem. It includes various events, conferences, and opportunities to connect with startups.
• Pitch@Palace: Pitch@Palace, founded by the Duke of York, connects startups with potential investors and mentors. They host regular events where startups present their ideas.
• Entrepreneur First: Entrepreneur First is an international talent investor, which supports individuals in building technology companies.
• Techstars: A 3-month accelerator to gain funding, mentorship, and access to the Techstars network
• Zinc: A 12-month platform that exists to build brand-new companies that tackle the biggest social challenges across the globe.

Remember that building a quality deal flow takes time. It’s essential to approach investments with due diligence and a long-term perspective. As you gain experience and reputation, your network and deal flow will naturally expand.

In the meantime let us know what other communities, syndicates and networks are out there to help build out angel investors their deal flow!

In the past, we have shared a number of technical blogs to equip our community members with the right skills when they are becoming angel investors. Despite all the content we have produced we also like to bring it back to the basics so that we don’t miss anything important for our members. So in this blog post, we decided to bring it all the way back:

How do you actually get started as an angel investor?

It might seem overwhelming to get started as a new angel investor but in this article, we will break down how to do your first angel investment in the UK in 6 easy steps. 

Step 1: The Basics of Being an Angel Investor

The first thing you need to do is familiarise yourself with the ABCs of angel investing. We have written some articles in the past, which will help you to develop not just your skillset as an angel investor but also your mindset. For instance, check out these articles “The 3 biggest mistakes angel investors make when investing in startups” or “Market Size in Angel Investing: What is it, Why it matters and How to calculate it?”. Putting the work in ahead of time and by familiarising yourself with some key concepts and terms will help increase your chance of becoming a successful angel investor. 

Step 2: Get Certified

Think of this as your angel investor badge. In the UK, you’ll want to get certified as either a High Net Worth Individual (HNWI) or a Sophisticated Investor. This is a straightforward process that helps ensure you have the knowledge and financial capacity to take on this role. When you take the cohort-based Angel Investing School program you will automatically be certified as an angel investor and be equipped with all the right skills to make good decisions during the investment process. 

Step 3: Source your first deal

You have done all the prework, got yourself certified and now it’s time to look for your first deal! There are a number of ways for you to find your first deal. Join reputable angel networks like Angel Investment Network, Seedrs, or Crowdcube. Attend local startup events, pitch competitions, and networking sessions. Events like “Pitch at Palace” or industry-specific gatherings provide opportunities to meet passionate founders and discover innovative ventures. When you join AIS you will immediately get access to high-quality dealflow on Slack. Don’t get frustrated when taking this step, some angel investors take years to develop their deal flow!

Step 4: Embrace the Lingo

Now you have found a pitch deck and founder that you like. Getting familiar with a few technical terms will help you understand the ask of the founder much better. Phrases like “Advanced Subscription Agreement” (ASA), “EIS/SEIS” (tax incentives that make your investments even sweeter), and “Term Sheets” (like a roadmap for your investment) will become part of your investing vocabulary in no time. Make sure you are very clear on these terms before you decide to go any further with a deal as you should never invest your money in something you don’t understand. Check out our AIS Dictionary to learn about the different terms you may come across during your journey 

Step 5: Research, Research, Research

Once you have reviewed the pitch deck and familiarised yourself with some key terms in the pitch deck it’s time for you to conduct your due diligence. Due diligence (DD) processes come in many shapes and forms and can last from days to weeks. Types of due diligence processes you can conduct are interviews, research, reference checks etc. It is important to remember that you don’t need to have all the answers during this process but what’s more important is to ask the right questions to reveal the value/risk proposition of an investment. Make sure you dive deep into the startup’s business plans, leadership team, and market potential. 

Step 6: Choose Your Investment Vehicle and Invest!

So you have done all the steps above and are ready to invest after a long and thorough DD process. It is now time to choose your investment vehicle. There are many different ways for you to invest as an angel investor. One popular option is an “equity investment,” where angels buy a percentage of the company’s ownership. Alternatively, they can opt for a “convertible note,” which starts as a loan but can convert into equity at a later funding round. Another approach is an “advanced subscription agreement,” a newer model similar to a convertible note, offering flexibility and simplicity in investment terms. As mentioned above make sure you familiarise yourself with each term before deciding. Once you have, make a decision and congratulations you have made your first investment!

Conclusion

And there you have it, you are officially an angel investor after following these steps and making your first angel investment! Remember, like anything new, it will take time to get a hang of it and this is why communities like the AIS are here to help you and support you on this journey. So, go ahead and take that leap – you’re now armed with the knowledge and steps to make your mark in the UK’s vibrant startup ecosystem as an angel investor. 

I am sure you must have heard other investors say “What is this company’s valuation” or you have seen TechCrunch publish an article about how “start-up Y has achieved unicorn status and is now valued at £1 Billion.” 

The word valuation is consistently used in combination with how much the founder is raising and how much equity you will be receiving as an investor. But it seems like valuations are something of a dark art, not always straightforward. So what are valuations, how do they work and how should we think about valuations?

Ultimately, the market determines the valuation for a startup. Keep reading on to see why we believe this to be true.

What are valuations?

Valuation refers to the process of determining the current worth of a startup or company. When angel investors invest in early-stage startups, they are essentially buying a portion of the company, and the valuation directly affects the price they pay for their equity stake. Therefore, it’s crucial for angel investors to carefully consider the valuation before making an investment decision.

There are a number of reasons why valuations matter. The most important reason is that the valuation of a startup determines how much money you will invest in to acquire a stake in the company. In return, this will directly affect the potential return you will make on your investment. A higher valuation means a larger investment for the same equity stake. Valuations also affect future potential exits. A high valuation during an exit is like a double-edged sword: if the valuation is high and a company gets acquired then you will get a higher return on your equity ownership, however, a higher valuation might also mean that it will be more difficult for a startup to be acquired. 

Lastly, as the venture capital and angel investing ecosystem has shown in the last few years in the Web3 and Crypto market valuations can also indicate the performance of a market. An unrealistically high valuation may signal that the company is overvalued, while an extremely low valuation may raise concerns about the startup’s potential for growth and success.

Mathematical example

I know this might sound very complicated so let’s take a look at a simple example to illustrate how valuation can affect an angel investor’s investment and potential returns.

Let’s picture an imaginary startup, AngelTech, which is seeking a £500,000 investment from angel investors. The founder is willing to give up 20% of the company’s equity in exchange for the investment. Therefore, the pre-money valuation of the company (the value before the investment) can be calculated as follows:

Pre-money valuation = Investment amount / Equity offered Pre-money valuation = £500,000 / 0.20 

Therefore the pre-money valuation = £2,500,000

Now, let’s consider two scenarios with different valuations:

Scenario 1: Low Valuation

AngelTech receives a £500,000 investment for 20% equity, as mentioned earlier. However, this time the angel investors negotiate a lower valuation for the company. They agree on a pre-money valuation of £1,000,000.

Post-money valuation = Pre-money valuation + Investment amount Post-money valuation = £1,000,000 + £500,000 Post-money valuation = £1,500,000

In this case, the angel investors now own 33.33% of AngelTech (since £500,000 / £1,500,000 = 0.3333). If AngelTech later becomes successful and is acquired or goes public at a higher valuation, the angel investors will have a higher potential return on their investment because they own a larger stake in the company.

Scenario 2: High Valuation

Now, let’s consider a different scenario where the angel investors agree to a higher pre-money valuation of £5,000,000 instead of £1,000,000.

Post-money valuation = Pre-money valuation + Investment amount Post-money valuation = £5,000,000 + £500,000 Post-money valuation = £5,500,000

In this case, the angel investors only own 9.09% of the company (since £500,000 / £5,500,000 = 0.0909). If AngelTech later achieves success and is acquired or goes public at a higher valuation, the angel investors have a lower potential return on their investment because they own a smaller stake in the company.

Conclusion

This simple mathematical example demonstrates how valuations can significantly impact angel investors’ ownership stakes and potential returns. As an angel investor, it’s essential to carefully assess the valuation and its implications before making an investment decision as this will directly impact your future returns during an exit.

Truth is, in 2023 the financial markets have been experiencing rising interest rates and high inflation. As a result, the cost of capital has gone up and therefore there is a direct impact on the investor’s appetite to invest. Therefore, referencing the example above, the AngelTech startup will be more likely to take a lower valuation in this market based on what investors are willing to pay. In this scenario, you could say founders are usually price takers rather than price setters when it comes to valuations.

When you think of an angel investor who comes to mind?

Maybe an executive who worked 20 years in an investment bank and now has £100,000s to invest or an eccentric billionaire who sold his Crypto startup for millions and is now advising the next big startup in Artificial Intelligence?

We all have different pictures and ideas of what an angel investor looks like but one thing is for certain you might think: as an angel investor I need A LOT of money before I can invest.

What if I told you that this is not the case? Through things such as Special Purpose Vehicles (SPVs), syndicates and crowdfunding angel investors are now people who invest as little as £1,000. There is a new breed of angel investors emerging and there is something that founders need as much as money when fundraising: Value add investors. 

Check out this instagram video where our founder Andy Ayim discusses how you can add value as an angel investor who wants to invest £1,000 in a startup. Some of these include helping the team with hiring, fundraising, connecting to customers and many more things. 

Here are 5 additional tangible ways you can add value as a small ticket investor:

1. Mentorship and Guidance

As an angel investor, you most likely have expertise in a certain industry or field. When investing in a founder who is in a similar industry to you, offer your expertise and industry knowledge to the founders. Act as a mentor and provide guidance on strategic decision-making, product development, market analysis, and scaling the business. Share your experiences, successes, and failures, and help them avoid common pitfalls. This will make you invaluable as an investor and you would be surprised to hear how much founders value these insights. 

2. Introductions and Networking

We all have a network. One way to support founders beyond money is to leverage your network to connect founders with potential customers, partners, or other investors. Introductions to key industry players or potential clients can significantly boost a startup’s growth prospects and support founders in their journey to becoming the next unicorn.

3. Operational Support

Founders have a very limited amount of time and resources. Another way you can support founders is by providing hands-on assistance in day-to-day operations or specific areas where you have expertise. This could include marketing strategies, financial planning, recruitment, or optimizing internal processes. This is something founders would find invaluable. 

4. Access to Resources

As mentioned above, founders at the beginning of their journey are usually very resource constrained. By utilising your connections and resources to help the founders access necessary tools, software, or services you can significantly accelerate the startups growth. This can be done by offering or finding discounted or preferential rates for essential business services to the founder, which can significantly reduce their operating cost.

5. Performance Tracking and Accountability: 

Setting clear goals and milestones is essential for any startups and you’d be surprised how often founders request your support by simply keeping them accountable. Make sure, however, not to overwhelm them constantly with requests or updates but offer your support and constructive feedback when appropriate to help them keep on track. This will help the founders stay focused and aligned with their growth objectives.

I hope this article teaches you that large sums don’t make you an angel investor and that angel investing is not simply about money. There are many different ways to be a useful and successful angel investor as shown in the examples above. 

What are your value adds?

Want to learn how to become a value add angel investor?

When thinking about exits, it can be quite an overwhelming topic to get your head around. 

When is the right time to exit? How will dilution impact my investment over time? How do I even exit from an investment?

All these questions seem daunting at first but luckily they don’t have to be!

Joe Kinvi, who is a FinTech expert, Founder and an Angel Investor will break it down for us here at the Angel Investing School. 

Here is what Joe Kinvi at the HoaQ Fund had to say about exits:

“Exits are a critical aspect of investing. When you make an investment, it is essential to consider your exit strategy. 

This strategy outlines how and when you will sell your investment to maximize your returns. Exiting an investment can be a simple process, especially when you own shares in a publicly listed company. However, it can be complex when you invest in startups.

When exiting a publicly listed investment, you simply log into your trading platform and sell your shares. This process is usually straightforward because there is always someone or an institution ready to buy them.

Exits in startups are not that straightforward. 

This is because the shares in most startups are not liquid. In most cases, your investment is a SAFE or an ASA, meaning that you don’t own any shares in the company until the SAFE or the ASA is converted into real shares. These are often called priced rounds (a price per share has been decided upon).

So when should you exit your investment?

Well, you can’t technically exit a SAFE because they are not shares unless the company decides to terminate the safe agreement. I’ve seen this scenario play out when the company pays the SAFE investor back. From an accounting perspective, because the safe is recorded as a liability on the balance sheet, the payout, if more than the initial value is recorded as the liability repayment plus interest (too much info I know 😅)

With this in mind, you can exit a company in a couple of scenarios:

1. The company has been acquired. The acquirer pays investors back in cash, shares or both.
2. The company goes public (we haven’t seen this in a while). Then you can sell your shares in the company on the public market

Because IPOs or acquisitions don’t happen quite regularly, what typically happens is companies raise multiple rounds from pre-seed to series X before they go public. This can happen over an extended period of time (10 years +). Side note: funds have a 10-year lifecycle because of this.

So if you invested at the pre-seed or seed stage of a company, do you have to wait until they reach a series X before exiting as an angel? 

Not quite. And you shouldn’t definitely wait that long because dilution would make your stake worthless over time.

I understand that it may take some time to get to the answer, but context really matters. One piece of advice I received and found practical is not to stay in a company as an angel investor for more than three rounds. This means that if you invested at the pre-seed stage, you ideally want to exit at Series B, if not even earlier at Series A. At this stage of the company, there are larger institutions who can afford to buy you out because they have ownership targets to meet, and the company is most likely at a completely different stage than when you initially invested. Additionally, as an angel investor, your value add is less significant to the company post-Series A. While you can stay on the cap table, your contribution as an angel investor is relatively minuscule, and you may want to take your money out and put it to work somewhere else. The common term used for transactions like this is called selling via secondaries.

There are also a couple of platforms such as Seeders and Crowdcube where you can sell your secondaries but you have to have invested through them. Not ideal.

To recap, you want to ideally exit a startup as an angel after 2 to 3 rounds of funding and the liquidity option is available.

How about the numbers?

Let’s take a look at a practical example:

Let’s say you invested $10,000 in a company at a $5M valuation post-money at pre-seed and that company raises their seed at $20M (10% dilution) and series A at $50M (20% dilution, no ESOP). 

At 20M, your stake is worth 3.6x. 

At 50M, your stake is worth 7.2x

So your 10K is now worth 72K (not 100K) when the company raises at $50M series A.

Super successful companies can achieve this in between 3-4 years. If this happens in 4 years, that’s around 150% return per annum. Quite impressive. If you stay in longer, the percentage growth will slow down and you’d end up being diluted over time. Does it make sense to get your money out and invest them in new investments? 

I think so but as you already know, I don’t give investment advice.”

In the competitive world of ride-hailing, Uber emerged as a trailblazing startup. But how did the Uber team make Uber what it is today? What stopped other competitors from replicating their business model? How did they win globally against the existing taxi market and local startup competitors such as Lyft?

One word: moat.

What is moat?

The word moat traditionally was a deep ditch, filled with water, that is dug surrounding a castle to form a line of defence. So much business terminology derives from war strategy terminology and moat is no different.

In the context of business, a moat, coined by the legendary investor Warren Buffett, refers to a sustainable competitive advantage that sets a company apart from its competitors and makes it difficult for them to replicate or surpass its success.

In the business world, a moat acts as a barrier to entry, protecting a company’s market position and ensuring its long-term profitability. Angel Investors and Venture Capitalists (VCs) are interested in startups that have built or are building startups with moat because they indicate a higher likelihood of success and a lower risk of being disrupted by competitors.

Let’s look at Uber’s moat as an example

There were a number of moats that Uber had which allowed them to become the number 1 right-sharing app globally.

Network effects

By developing a robust mobile app, Uber seamlessly connected riders with drivers and created a two-sided marketplace. As more riders joined the platform, it attracted an increasing number of drivers seeking additional income, reinforcing the network effect. More riders led to more drivers making the network stronger and stronger.

Customer experience

Uber’s early focus on customer experience and technological innovation cemented their moat. They invested heavily in mapping technology, real-time data analytics, and surge pricing algorithms, optimizing efficiency and ensuring a superior user experience. Remember that magic moment the first time you ordered an Uber with your smartphone and if by magic 2 minutes later a cab arrived to take you to your destination.

First-mover advantage

To protect their competitive advantage, Uber aggressively expanded into new markets, creating high barriers to entry for potential competitors. They entered cities quickly, often before local regulations could catch up, allowing them to gain a first-mover advantage. This meant whether you were in San Francisco, USA or Cape Town, South Africa, you could rely on Uber.

Brand 

Uber also capitalized on the power of their brand, becoming synonymous with on-demand transportation. Their brand recognition and trust among consumers further solidified their moat, making it challenging for newcomers to match their market presence.

Data 

Additionally, Uber’s ability to leverage data collected from millions of rides allowed them to optimize driver routes, reduce wait times, and continually enhance their services, making it difficult for competitors to replicate their operational efficiency.

Types of moat

As seen in the example of Uber, moat can come in many different shapes and forms. The most common barrier of entry that most people think about is probably IP (Intellectually Property). However, there are numerous other ways for a startup to have MOAT.

1. Network Effects: Companies that benefit from network effects have a moat. Network effects occur when the value of a product or service increases as more users or participants join the network. Examples include social media platforms, marketplaces, and communication tools.
2. Brand and Reputation: A strong brand and a positive reputation can act as a moat. When customers trust and recognize a brand, they are more likely to choose its products or services over competitors, even if they are cheaper or have similar features.
3. Switching Costs: Startups that can create high switching costs for their customers have a moat. Switching costs refer to the expenses, effort, or inconvenience customers face when switching from one product or service provider to another. Examples include enterprise software with complex integrations or platforms with user data lock-in.
4. Economies of Scale: Companies that benefit from significant economies of scale have a moat. By operating at a larger scale, they can achieve lower costs per unit and potentially offer more competitive pricing or superior infrastructure compared to smaller competitors.

Conclusion

As Uber’s moat strengthened, the company diversified their offerings beyond traditional ride-hailing. They introduced services like UberEATS, expanding into the food delivery market and leveraging their existing driver network to gain a competitive edge.

Investors recognised the power of Uber’s moat, leading to significant funding rounds that fueled their expansion globally. This financial backing, coupled with its dominant position in the ride-hailing industry, solidified Uber’s status as a startup that successfully utilised a moat to achieve tremendous success.

Through network effects, technological innovation, aggressive market expansion, brand recognition, and diversification, Uber created a moat that not only revolutionised the transportation industry but also redefined the way people move from point A to point B.

In 2009, angel investor Peter Thiel made a notable investment in a relatively unknown startup, which is now known as Facebook. Peter Thiel is one of Facebook’s, SpaceX’s, Airbnb’s and LinkedIn’s first investors, the Co-Founder of PayPal and Chairman of Palantir.  

When Facebook first launched, it was primarily focused on connecting college students and it had gained some traction in that niche market. However, Peter Thiel saw Facebook as much more than a college campus social network. What caught Peter Thiel’s attention was not just the product or the team behind Facebook but the enormous market potential it represented. He believed that if Facebook could scale and capture even a small fraction of the global social media market, it could become an immensely valuable company.

Based on this market size and growth potential assessment, Peter Thiel invested $500,000 in Facebook as an angel investor. His investment helped fuel the company’s expansion and allowed it to attract further investments from venture capitalists.

As we know today, Facebook surpassed its initial college-focused market to connect billions of people globally, generating substantial revenue and establishing a powerful advertising ecosystem.

Peter Thiel’s early recognition of the market size and growth potential of Facebook played a crucial role in his investment decision. By understanding the immense scale and possibilities within the social media market, he made a strategic investment that yielded significant returns and positioned him as a successful angel investor in the technology space.

So what is market size and how does it work?

What is “market sizing” in angel investing and why does it matter?

Angel investing is an inherently risky business, therefore, it is important, where possible, to mitigate any risk as much as possible to maximise your chances of making a return on your investment.

One way angel investors can reduce their risk of making a loss on their investment is by estimating the market size in which the startup operates. This might sound a bit strange but there is a good reason behind this thinking. 

You might meet a very interesting founder who is developing a product but turns out that the market is very small and very niche and there are only a few hundred customers for this product. The likelihood of making a substantial return on your £10,000 investment if there are only 100 customers in a market and the product costs £10 is very low even when you assume that all potential customers in this small market will buy your product. 

On the other hand, if the potential market has 10s of millions customers then there is a much higher chance for you to make a return on your investments as there are more customers available to purchase the product. 

Larger markets also indicate a larger potential for revenue growth and overall scalability in the future. Scalability means that a business is growing in revenue whilst preventing its costs from growing at the same rate. Highly scalable products include SaaS (software as a service) products for example as the software remains the same (maintained cost) but a large number of customers can be acquired (scalability).

Since larger markets mean potential growth in the future, this also means that there is a higher likelihood of attracting future investment from other investors such as venture capitalists (VCs). VCs tend to invest in startups in sizable markets which have large growth potential and just like growth after an angel investment can lead to VC investment, VC investment can lead to further investment (pre-seed toseed and beyond). 

A few important terms

Before diving into how to calculate the market size, let’s look at some important terminology you need to be aware of as an angel investor when discussing market size. There are three key terms to remember: TAM, SAM and SOM.  

Total Addressable Market (TAM): TAM represents the total market demand for a specific product or service. It is the total revenue opportunity available if a company captured 100% market share in a given market. TAM encompasses the entire market, including current and potential customers, regardless of whether they are currently being served by any companies.

Serviceable Addressable Market (SAM): SAM is a subset of the TAM and represents the portion of the market that a company can realistically target and serve with its products or services. SAM takes into account factors such as geographical limitations, customer segments, industry verticals, or other constraints that affect a company’s ability to reach and serve the entire market.

Share of Market (SOM): Or Market Share refers to the percentage or proportion of the total market that a company controls. It is calculated by dividing a company’s revenue or sales by the total market revenue or sales. Market share indicates a company’s position in relation to its competitors and its ability to capture a portion of the market demand.

Understanding these key terms is critical to estimating the market size of your product or service. 

How can you calculate market size?

Calculating the market size seems more daunting than it has to be. There is no one way to do so and there are several approaches you can take as an angel investor, the two main ones being the top-down and the bottom-up approach. It mainly depends on the industry you invest in and the available data. 

Top-Down Approach

This top-down approach involves identifying a broad industry or market and then narrowing it down to the specific product or service of interest.

Here is a great example from a LinkedIn post:

For example, if you want to size the market for electric vehicles in the US, you could start with the total number of vehicles sold in the US, then multiply it by the percentage of electric vehicles, and then adjust for other factors such as price, demand, and competition.

It typically relies on secondary research, industry reports, government data, and market studies. The process involves gathering data on the total market revenue or sales and then estimating the portion of the market that corresponds to the product or service in question.

Bottom-Up Approach: 

The bottom-up approach involves aggregating data from individual customers, companies, or specific segments and then extrapolating it to calculate the total market size. 

Here is a great example from a LinkedIn post:

For example, if you want to size the market for electric vehicles in the US, you could start with the number of customers who are willing and able to buy an electric vehicle, then multiply it by the average revenue per customer, and then adjust for other factors such as market share, growth rate, and competition.

This method often relies on primary research, surveys, interviews, or customer data collection. By analyzing the market demand of individual segments or customers, an estimate of the overall market size can be derived.

Other approaches, which are less common but also less useful are the value-based approach and the revenue-based approach.

Value-Based Approach

In some cases, market size can be calculated based on the value or volume of goods or services consumed by customers. For example, if the market is for a specific commodity or resource, such as oil or electricity, the market size can be determined by the total consumption or demand for that resource.

Revenue-Based Approach

This approach involves estimating market size based on the revenue generated by companies operating in the market. By analyzing the financial statements, reports, or industry data of companies within the market, an estimate of the overall market size can be derived.

It’s important to remember that market size calculations are often based on assumptions and estimations since it’s challenging to obtain precise and comprehensive data for every market. Different sources and methodologies can lead to variations in market size estimates. When doing market sizing, it’s crucial to rely on multiple data sources, triangulate information, and consider various perspectives to arrive at a reasonable estimate of market size and where possible to conduct a sensitivity analysis to check the robustness of the market size calculations and pin-point the key drivers of the model. 

A sensitivity analysis in simple terms helps to understand which key assumptions drive the market size model. For example, if I change the number of customers who use portable chargers from 80% to 60%, how much would the overall market size change if I have 20 other assumptions in my market size model?

Summary 

In conclusion, market sizing holds significant importance in angel investing. A large market size indicates growth potential, scalability, and the ability to attract future investors. Investing in startups operating in sizable markets increases the likelihood of achieving high returns on investment. 

Overall, market size serves as a key factor for angel investors in evaluating investment opportunities and maximizing their chances of success.

Interested in understanding startups, we have an in-depth course within our membership which you can join here.

In 2015, I moved from San Francisco to London and joined a Fintech startup, WordlFirst. They eventually got acquired by Ant Financial for $700m and despite being hired as the first Product Manager, I had no equity and didn’t benefit from the upside of the exit.

It taught me a lesson about remuneration at high-growth companies.

There are 3 ways individuals can generate wealth from startups. This was a key revelation to me; it’s all about owning equity and ownership. Here are the ways you can own equity in a startup:

1. Start a startup, having majority ownership as a founder
2. Invest in a startup, having minority ownership as an angel investor
3. Earn equity in a startup, usually as an employee, you can benefit from equity as part of your remuneration package from an Option Pool

What are Employee Option Pools?

An option pool consists of shares of stock (also known as equity) reserved for employees of a private company (also known as a startup). The option pool is a way of attracting talented employees to join a startup company. It also helps attract top talent as startups often operate on a tight budget especially in the early days so using a mixture of pay and equity helps. The aspiration is that employees can help the company do well enough to go public or get acquired so that they will be compensated with stock.

What are the benefits of Option Pools?

Incentivising top talent to join you early. 

You’re unlikely to have the budget to pay market-rate salaries (i.e. what Google, Meta etc. pay). These future employees should be driven by aligned incentives. You want/need them to buy into your vision and live and breathe that long journey. Equity is the best way to balance this all out.

Let’s take a European company raising £2m pre-Seed round at a £10m pre-money valuation (for simplicity, these numbers have been used). Post-money valuation at £12m.

Please note, below is an illustrative example, there is not 1-size fits all approach to this, context matters. Deep Tech will differ from consumer goods and so on.

The Option Pool:

A 10% option pool is standard and should be created at the pre-Seed round (you don’t have to use it all immediately!). It is common to see this implemented BEFORE funding comes in (i.e. before the equity distribution to incoming investors). The main reason for this is that VC investors don’t want their ownership reduced immediately after investing in the round, they want to protect themselves.

2 founders with 50% of the business each. A 10% pool is created pre-funding, diluting the Founders down to 45% each before cash comes into the business.

Post funding, this 10% option pool will be diluted by 20% to 8% net, so you will have 8% to utilise.

Example Roles / Allocations (% = total company shares. 100% gross):

Technical Team 🧑‍💻

Note: I’m basing the option allocation as 80% of the annual salary (Senior) :

Senior Fullstack Eng

Salary = £120k

Options = 0.72%

Non-Technical Team 💰

Note: I’m basing the option allocation as 70% of the annual salary (Senior) and 60% (Mid-level):

Senior Head of Biz Dev:

Salary = £70,000

Options = 0.49%

Product Manager (mid-level):

Salary = £60,000

Options = 0.36%

These are some limited examples and I could go on, but this is a benchmark on what I’m seeing. Obviously, you won’t be hiring for all of these roles, so the full allocation won’t be swallowed up before your next round, but this is an example using data from a number of portfolio companies and the wider community. 

It is unlikely you will use all of your option pool allocations before the next funding round.

How do Vesting Equity Schedules work?

When employees receive equity from an options pool, it isn’t given to them all on day one of joining the company. The main reason for this is that you want to incentivise and reward them for staying with the company and helping it grow over a number of years. Rather than receiving equity and leaving within 6 months. Founder vesting is pretty common too.

A vesting schedule is a predetermined plan that outlines the percentage of equity available to an employee at specific intervals during the vesting period.

The most common vesting structure I see is 4-year vesting, with a 1-year cliff. This means you get 0% vesting for the first 12 months, 25% vesting at the 12th month, and 1/48th (2.08%) more vesting each month until the 48th month.

Interested in crunching the numbers for your business? Check out Index Ventures Option Plan Calculator 

Also worth reading our previous article on What is Dilution? with a neat Dilution & Exit Calculator at the end of that article too.

Thank you to our friend Kieran Hill, Partner at 20VC who originally posted this article on Linkedin which we have adapted slightly with his permission.

At the start of the year, we learned about how JP Morgan acquired a startup called Frank for $175m, to learn that due diligence wasn’t carried out properly and are now clearing out a messy public legal battle.

Angel investing is an extremely fulfilling form of investing as you get to work with some very talented and exciting people who have ambitions to change the world. However, investing without the right education can be very dangerous and lead to costly mistakes. Understanding how equity, dilution and returns work is a critical skill to gain before making an angel investment. 

There are many pitfalls you need to be aware of before writing your first check. Here is an example of a blog post we wrote to help you educate yourself before making your first investment: The 3 biggest mistakes angel investors make when investing in startups.

One key term that angel investors need to be aware of before angel investing is the word dilution. 

What is dilution?

In angel investing, dilution refers to the decrease in percentage ownership that an investor has in a company due to the issuance of new shares of stock. Dilution occurs when a company raises additional capital by selling new shares of stock to new investors or by issuing stock options or warrants to employees or other stakeholders. This happens when a startup raises a new round of funding.

When a company raises new capital, the total number of outstanding shares increases, and the ownership percentage of existing shareholders decreases. Dilution can be significant in early-stage companies, where multiple rounds of funding may be required to finance growth and development.

For angel investors, dilution can have both positive and negative effects. On the one hand, dilution can be a sign that the company is growing and attracting new investors, which may increase the value of the investor’s remaining shares as the startup’s valuation increases. On the other hand, dilution can also decrease the value of the investor’s existing shares and reduce their potential return on investment.

As an angel investor, it is important for you to understand what dilution means as dilution can have a significant impact on your portfolio and as a result your returns. 

Here is a numerical and simple example of how an angel investor can be diluted: 

Let’s say an angel investor invests £100,000 for a 10% ownership stake (pre-money valuation £500,000, post-money valuation £1 million) in a startup company that has 1 million outstanding shares of common stock. This means the investor owns 100,000 shares of the company.

The startup company later decides to raise additional capital by issuing 500,000 new shares of common stock to new investors at a valuation of $2 million. This means the new investors are collectively investing £1 million in exchange for a 50% ownership stake in the company.

After the new investment round, the total number of outstanding shares of common stock is now 1.5 million. The angel investor’s ownership percentage is now diluted to 6.67% (100,000 shares divided by 1.5 million shares). The investor’s percentage ownership has decreased due to the issuance of new shares but due to the increase in the company’s overall valuation, the angel investors investment still increased in value (£1 per share during the pre-seed round vs. £1.33 per share during the seed round.).

In this example, we can see how dilution works and how this angel investor experienced dilution of their ownership percentage from 10% to 6.67% due to the issuance of new shares of stock. 

Here are 5 steps you can take to avoid dilution in the future:

Angel investors can avoid dilution or reduce its impact by taking the following steps:

1. Negotiate favourable terms: As an angel investor negotiate protective provisions in an investment agreement, such as anti-dilution provisions, which can protect your ownership percentage in case the company issues new shares in the future.
2. Stay involved in the company: To maintain your ownership in a company, make sure you have capital allocated for follow-up rounds to increase your ownership stake in the company and avoid dilution. Be aware this often involves investing more than you did in the first round you invested.
3. Help the company grow: You can help a company grow and achieve milestones by leveraging your networks, experience, and industry knowledge. A growing company is likely to have a higher valuation, which can mitigate the impact of dilution.
4. Invest in convertible debt or preferred stock: You can invest in convertible debt or preferred stock, which can provide you with certain rights and preferences, such as the ability to convert your investment into equity at a later date at a pre-agreed valuation.
5. Diversify your portfolio: You can diversify your portfolio by investing in multiple companies. This can help reduce the impact of dilution in any one company and improve the overall risk-return profile of your investment portfolio.

While dilution is an inherent risk in angel investing, taking these steps can help angel investors to mitigate the impact of dilution and increase the potential for a successful investment outcome.

Interesting in learning more about how equity dilution could impact you in the future? Look no further, check out this FREE Dilution & Equity calculator by our friends U2R.