We created the AirTree Explorer program to find and nurture the next generation of angel investors in ANZ, with a specific focus on bringing diversity to an old-school industry. 

We're all about democratising access to information to grow and support the whole startup ecosystem, so we decided to open source some key insights from the Explorer program. 

We’ve already released our first piece in this series, Angel Investing 101, to help anyone at the beginning of their angel investing journey improve their knowledge and build confidence.

In this piece, we’ll explore deal sourcing, including:

• How to work out what kind of investor you want to be
• Top-down and bottom-up approaches
• Examples of different approaches in practice
  

The big questions

Deal sourcing is one of the hardest parts of being an investor, primarily because it's not easy to develop a scalable process for it. Ultimately, you need to find whatever method gives you energy, so you can keep at it without getting burnt out.

When thinking about how you’ll approach deal flow, there are a few big questions about what kind of investor you want to be and how you want to invest that you need to answer. If you start pounding the pavements at networking events before working through the following questions, it’s easy to open up your deal flow funnel too wide and burn out quickly.‍

Q1. What do you value in a founder?

Many different types of people can be founders, and if the company (and your investment) is successful, you’ll be closely collaborating with this founder for around 10 years. That’s why it’s important to understand what values you’re looking for.

As an example, I have three values I always look out for: speed, resilience and integrity. Speed is the only advantage startups have over incumbents so it’s crucial that the founders can build and iterate quickly, evolving the product until they find product-market fit. Resilience and integrity are similarly important, because you want to know that founders can survive the relentless setbacks of the founder journey (hopefully interspersed with highs along the way!), and build trust through open communication with you.

This example should be taken as illustrative and not prescriptive. Your top values for founders may or may not match mine; the important part is to articulate what you’re looking for and why.‍

Q2: What’s your unfair advantage?

This question is one that founders have to answer a lot. Why are they uniquely positioned to solve this problem? Turn this line of questioning back on yourself. Money is fungible, so why should a founder pick you over other angel investors? Particularly if you’re starting out writing small cheques, have a think about how you’re best suited to help a founder, outside of investment.

A lot of competitive advantages for angel investors come down to reputation:

• Do you have a stellar network?
• Do you have technical capability in an industry?
• Do you have past experience with problems the founder is looking to solve?
• Have you provided useful advice in this area before?
• Are you a good person to work with?
  

Technical or operational expertise is not the be-all and end-all competitive advantage. Many of Australia’s most prolific angels aren’t known for one specific technical skill set that sets them apart. Instead, the common theme is that they make quick decisions with conviction, have a reputation for supporting founders through tough times, and have strong networks to help founders in the next stage of their journey.

Q3: What kind of startups do you want to invest in?

Some angels focus their investments into specific industries or founder teams. They may have a strong passion for the category (e.g. a deep interest in climate tech) or a commitment to supporting underrepresented founders. 

You can also keep your investment thesis broad, but consider how this may impact the time you have to spend on angel investing. If you’ve got a full-time job, you likely have a couple of hours a week to meet founders. If you can only speak to a few founders a week, how can you narrow down your focus?

Some questions to consider if you’re trying to narrow down your focus:

• What are you good at?
• What interests you?
• Do you want to focus on a specific sector(s)/founder group(s)?
  

Deal sourcing approaches

Deal sourcing is hard, and there’s no one “right” way to do it. It often starts with angels trialling different methods and hoping some will stick.

We’ve put together a couple of approaches for you to consider, based on our ways of working at AirTree.

Top-down: thesis-driven

There are some funds and angel investors that operate purely top-down; they have a niche (e.g. developer tools) and stick to it. That way, they can meet many of the companies operating in that sector and form opinions on where the industry or technology is going based on domain expertise.

How this works in practice at AirTree is an investor performing a “deep dive” into a specific area. You pick a sector or emerging technology and try to learn everything you can about it through online research, conversations with experts in the field (academics, operators etc.) and by meeting with all of the companies in Australia and New Zealand who are building in that space. By the end of this process, you can form a fairly conclusive view of where you think the opportunities lie.

Here’s an example of how this deep dive process can work. In 2019, I decided to do a deep dive into business banking after seeing the rise of several neo-banks targeting consumers, not businesses. After researching the industry, I looked at all of the companies (around five or six at the time) trying to solve business banking problems. From there, I considered which companies had the best thesis, pricing model, go-to-market, entry point and chance at winning. That started my relationship with Hnry, who were only operating in New Zealand at the time. Two years later, they expanded into Australia, which confirmed my conviction that their product had applications across all Commonwealth countries (and a big TAM). AirTree then invested into Hnry’s Series B raise in 2022. ‍

Bottom-up

This is the approach that people tend to think of first for sourcing deal flow—putting yourself out there at events and building a personal brand. Activities that may be part of a bottom-up approach include:

• Events (networking, pitch nights, conferences, 361 Angel Club)
• Programs (AirTree Explorer Program 👀)
• Socials and community groups (Linkedin, Twitter, Earlywork)
• Syndicates
• Accelerators (List of accelerators here)
• Media (TechCrunch, SmartCompany)
• Product Hunt
• Endless coffee meetings (Don’t be that person who spams everyone though, be strategic in who you want to meet. You can check out our open source investor list to find other angels)

Build an inbound engine

Wish startups would come to you? There are a few ways to set up inbound deal flow:

• Spread the word: Make sure people know you’re investing. Add yourself to our open source angel investor list, get active in community groups and go to ecosystem networking events to build your profile.
• Become known for something: Posting on socials, starting a blog, podcast, newsletter or other creative outlet can be a great way to build your profile and give you an excuse to reach out to founders, see Rohit Bhargava and Sachin & Adam for inspo.
• Mentor at accelerators: Mentoring at accelerators is an easy way to boost your profile and meet very early-stage founders. 
  

With all of these inbound suggestions, it’s important to find methods that give you energy. If creating a podcast is going to be draining, but you love writing, maybe a newsletter will be better suited to you.

Disclaimer: This article contains general information only, and does not constitute legal, financial or tax advice, nor does it take into account your personal circumstances. You should always seek independent professional advice before acting on any information in this article.