Are small angel checks the most impactful?
Exploring how small angel checks can make an outsized impact.
During a recent podcast interview with Brian Nichols, founder of Hustle Fund’s Angel Squad, we discussed how small checks from angel investors could significantly impact a startup. There were some Twitter conversations around this topic, and I believe it's important to unpack.
“The people who write the $1k, $2k check are the most helpful at supporting the founder[s]” - Brian Nichols
Firstly, it's not the check size that matters; it's the ripple effect it creates. Taking small checks from angel investors often leads to introductions to other investors, resulting in a multiplicative effect, or the "money multiplier." These angel investors often work in the tech industry and are keen to help startups grow. As a result, they are an excellent resource for solving problems and making introductions to other companies. Steven Fitzsimmons of Freshpaint perfectly visualizes this point, which Brian initially shared on Twitter.
Secondly, access to capital is crucial for startups. With the advent of SPVs, AngelList, and crowdfunding sites like Wefunder, there is more opportunity for investors to aggregate small checks into one more significant investment. The aggregation of investors benefits startups and provides opportunities for investors who would not typically have access. As a result, more people are invested in a startup's success, which can be a significant advantage.
I would venture (pun intended) to say that most investors don’t even know they can write small checks, and Justin Gordon of VITALIZE confirms this sentiment. The rise of angel schools and collectives like Hustle Fund’s Angel Squad and VITALIZE Angels have helped to solve this and get more people into angel investing. As long as new angels are adequately informed and educated, there is only an upside to growing the ecosystem.
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However, there are downsides, such as the additional work required to manage many investors and a messy cap table. Our friend JT Garwood at bttn has some notable points as a Founder/CEO and Angel Investor in this thread.
CEOs and other operators may find it challenging to manage the wants and needs of numerous investors who have contributed small amounts hence the need for SPVs and Rollup Vehicles (RUVs). These aggregation vehicles allow the company to have a General Partner (GP) as the point of contact and represent numerous investors. This means one entry on the cap table, making it cleaner.
A meaningful area of concern is that small checks generally come from less sophisticated investors. Depending on the fund type, investors will be required to be accredited investors, and in the case of crowdfunding, they will not but will have a cap on what they can invest per year. Hustle Fund’s Angel School works to solve the accreditation issue by offering to pay for investors to get the Series 65 license once completed but also teaches people how to be an investor by live streaming deal flow review meetings with their GPs.
For crowdfunding, these “retail” investors can invest with considerably less knowledge of a business than their institutional counterparts. This was extremely evident in the Substack crowdfunding campaign, where Wefunder didn’t disclose the company's financials until after the subscription period. This process is sup-optimal for small check investors and could lead to companies raising from retail/small check investors because they can’t raise at the same terms from institutional parties. VITALIZE Angels address this with their unique model and allow accredited and non-accredited angels to invest in highly vetted/diligenced deals within their pipeline.
"Our new cohort approach is really gaining momentum with angels, and it's amazing to see that 70% of our check writers are under-represented. Everyone is truly welcome, experienced and rookies alike." - Gale Wilkinson, managing partner at VITALIZE and Future Episode Guest
As always, the goal is to balance access for everyone, increasing access for previously underserved and underrepresented groups in investing while maintaining high-quality investment opportunities.
One last downside to this approach is the issuing/filing K-1s, which can be time-consuming for investors in SPVs/RUVs and GPs supporting them.
As always, an example IRL best illustrates how a small check can be impactful. One notable story trending recently was the story of Vimcal, shared by CEO John Li, and how a $5K check saved the company. While this is a bit of an outlier, it is a reminder that cash is oxygen for a drowning startup, no matter the quantity.
A potential "money multiplier" effect exists when accepting small checks from angel investors. While there are downsides to consider, the benefits of gaining access to capital and building a network of invested individuals can be a significant advantage to startups. Moreover, it is exciting for investors to know that smaller checks are OK and that startups might be willing to take them. As the industry continues to evolve, it's clear that small checks from angel investors, whether direct or through an SPV, will increase in frequency and can considerably impact a startup's success both monetarily and from an operational perspective.
We love writing small checks and providing outsized support to startups here at Wannabe Angels, and we are excited to help grow the angel investing ecosystem. If you like this post, please share it with your fellow angel investors. 👇
This is super thoughtful. So glad you guys are putting these together now!