9 Insights on Angel Investing: Office Hours with Danika Koenig

Welcome to Merit Office Hours! This week we're talking to angel investor, operator, and scout Danika Koenig. She shares what makes a good angel, the value an angel can bring to a startup, and how to get started angel investing.

Danika is currently the Head of Payments and Growth at Ness, a health and wellness credit card (think Chase Sapphire for Health and Wellness). We have broader ambitions in the wellcare space and will use the credit card the form factor to embed and deliver customized health care offerings. She's a 2X former founder and an entrepreneur at heart having spent almost 5 years at Stripe helping build out the early team and scale the company from ~200 --> ~3000 people, ~10 --> ~40+ countries, and expanded access to internet infrastructure for millions of online businesses. She's a product partner that deeply understands the importance of the right abstraction layers and can also hustle to get the deal done. Prior to Stripe she worked in Investment Banking, United States Senate, and Strategy Consulting at Deloitte. She understands complex industries and has successfully navigated them to launch first of a kind products. She's an active Angel and can help companies with operations, payments, going global, risk regulatory, and has deep connections to the Xtripe community. Feel free to reach out to her directly hello@danikabuilt.com.

This conversation has been edited and condensed for length and clarity.

Rachel Spurrier: How would you describe what an angel investor does?

Danika Koeing: Angel investors do a couple of things. They spend a lot of time just seeing what technology is in the market and then reaching out to founders to understand what they're building. Ultimately, angel investing is finding a person, a founder, you really believe in and who you think has an insight and directly financially supporting them.

Depending on the stage of the products, angel investing is you investing in the company. As an angel, you are able to write a smaller check than maybe an institutional investor would—anywhere from $5,000 to $50,000. I know that's kind of a broad range. That money allows you to buy ownership. Someone described it as a very expensive hobby [laughs].

I angel invest because I love working with founders and building businesses. Angels are often angel operators. You see that additional function because they're people who have worked at growing startups or they have a bit of insight that they can share. So founders are interested in certain angels because they can get the expertise and also a financial relationship.

I started angel investing when I started my last company. I was reached out to by a ton of VCs but didn’t know how to think about those funds in relation to the ecosystem, so I wanted to learn more. By the time I got to Ness, I was about 1.5 years into my investing journey.

I'd never really seen the other side, but then I started peeling back the layers, the mechanics. So I became very interested. Ultimately I realized the value that venture brings to the ecosystem of placing bets and helping founders that might not have the same platform or an idea that isn't maybe necessarily being run by a typical type founder.

RS: How would you describe the difference between VC funding and angel investments?

DK: Angels are typically individuals or groups of individuals whereas as a venture fund typically raises money from other limited partners, who have more requirements in terms of [financial] returns. As an individual, I'm not a business. I write one small check to a company. So if they end up going bankrupt, I don't have recourse. Sometimes founders sometimes like angels because it's a lower-stakes relationship, whereas you're not gonna tell your lead VC, "Oh my gosh, I think we're gonna fail tomorrow."

With an angel, a founder can have a more real conversation because we don’t have 50% ownership of the company or whatever it might be. Because it's a lower-stakes relationship, it allows you as the angel to actually be more of an asset and provide that operational assistance because the founders know that they can bring you problems that they maybe wouldn't bring to more of the adults in the room.

RS: It's my understanding that a lot of times with VC funding, there are large expectations for return on investment, whereas, for an angel investor, like you mentioned, if the investment doesn't pan out, the risk is much smaller. So it seems like the expectations and pressures might be a little bit between the two approaches. Would you say that’s accurate?

DK: Exactly. I had one founder who reached out to me and needed to replace their head of product. That was something that they didn't want to go to their lead investor with. So I was then able to be that sounding board as they were working through that problem.

Angels sometimes go on to do venture as their career. I would say for myself, I had never understood what it meant to work in venture. Angel investing is a great way for people who potentially are interested in being an asset allocator working in venture funding to see what it's actually like without having to do it full time.

I didn't actually approach it like that, but as I've done it more and more, I realized I actually enjoy it. In the future, I might be interested in working as a VC, whereas if you would've asked me before I starting doing any of this, I would have said, "Absolutely no." I’ve been able to try something new without actually changing my entire life and career, which I've done multiple times.

Lastly, it made me appreciate the business that I'm running. I think angel investing has made me just a better business person to understand holistically end-to-end: the product, the dollars and cents, and how do you make this a defensible business? I feel like it's actually made me a lot more well-rounded in terms of being a general manager type.

RS: You're also a a scout. When you work as a scout and as an angel investor, what are the things that you look for in a company? Do you have different criteria when you have your scout hat on versus your angel investing hat?

DK: I do because it's why I'm a solo angel investor. Sometimes I do write checks just for myself. I also am a scout for Bonfire, and you can think of it as like I'm an intern for them. I'm given an amount of money, and I do the work of finding the companies and deals.

I also help co-lead the ex-Stripe syndicate. We are essentially a collection of Xtripes [Stripe alumni] who have left and now are working in industry doing other things, and we have collectively formed a syndicate so that we invest as a group. And you get funds but also the operational experience I was talking about within the aggregate.

I do have different approaches when I'm thinking either of my own funds specifically versus, say, Bonfire's because our theses are just a little bit different. I'm a little bit more early tech. I really care about the engineering team. If it is an incredibly solid engineer who can build anything, I think that is a worthwhile a bet even if there's not a line of code written because I have seen in my experience that companies built with strong engineering foundations that optimize a technology solution versus operations scale much more effectively. With that being said, even with Merit, it really is the founder. It's: founder, founder, founder.

Starting a company with no product during the beginning is the hardest thing. I'm doing it right now. I don't know if I'll do it again, to be honest. It's so much work. You really have to have the personality to persevere, but also to tell a story that is not real yet. You have to convince people and be that ultimate sales person, but you also have the skills to be the HR person, the IT person, as you assemble that best-in-class team. And so it's the founder, first and foremost.

And I guess I should also say too: I do have a particular thesis. I look for internet infrastructure, fintech, software businesses. But I think the second one is the space. The space is really important. Coming from Stripe, a company that was very focused on internet, I look to see “Is the infrastructure there? What are the pipes? What are the roads that we need to build so that other companies can do things on top of it?”

That’s the level I'm looking at: backend, tech-forward type businesses that are looking to grow. I'm not as price sensitive, which maybe I should be. But I go for it if it’s just an amazing engineer and they have a top-notch VC leading the rounds. To me, that's worth the premium.

Bonfire is a little bit different in that companies specifically need to be SaaS. So no consumer, nothing else.  They're looking for places that people actually really aren't paying attention to yet. It does need to be SaaS, but they're looking to define industries that don't even exist. So they're making very early, long-term bets, like 10 to 15 years. Because they are there for the long-term, they really do care about making sure that the price they pay initially is a good value.

RS: What advice would you give to someone who is considering becoming an angel investor?

DK: If you're not already in tech, really get up to speed. Learn the lingo, learn the phrases, learn the names that people are talking about, learn the systems. ****I tried to learn how to code. I taught myself SQL and some other languages. I didn't get that far, but I still was able to understand the language and the syntax. So first and foremost, just really immerse yourself so that when you do see a business, you're able to quickly pattern match to other businesses that might exist, and if they don't, then you've already identified that opportunity.

With that being said, be like a sponge. You need to have the insatiable interest in getting to the problem and trying to find problems without solutions. That requires reading a lot, listening to a lot of podcasts so you can say, "Oh, that's an interesting idea," and it leads you down a rabbit hole. Having that wealth of knowledge makes you an asset to founders.

The last piece of advice is to always offer assistance: "How can I help you?" If somebody reaches out over LinkedIn, I pretty much reply to everyone. And if someone wants to meet with me, I pretty much always say yes. Be open and try to be helpful without actually expecting anything in return because I do think sometimes people are like, "Oh, what's in it for me?" You don't know. It could be your next boss, or it just could be a one-off conversation. If I look at my own experience, just picking up the phone was the difference between me getting a job in the senate and not because I just would have ended up in a queue.

So I do try to make those opportunities available. For people interested in being an angel investor, it's the same thing. Try to be of assistance, try to help people, because it will ultimately come back to you. You’ll get a reputation for being an angel who people want to work with. You start to get deals sent to you from other really well-known angels, and you start to get better and better deal flow because you're known to actually be of value and of assistance.

It's a little bit: don't be a jerk; do what you say you're gonna do; and do it with good intentions.

I would say the one thing about angel investing is unfortunately, the barriers are high. It does require assets. You might not have them now, so also think about: if you can't be an angel, be an operator. Get the skills that you can bring to the table.

Investing is fun, but it's perilous. It’s, “I hope I see this money again one day.”

I have a young child. It's not like I have a ton of money myself, so before someone just starts going out there and writing  checks, really think about, “What do you care about? What motivates you?” That narrows where within the ecosystem would be the best position to be successful.

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