The startup and early stage of a new business is a "live or die" situation which depends on having enough money to operate with until your revenue exceeds your expenses.
This can take at least 6 months or more while everything gets figured out and you have enough customers. You need operating capital and mentoring. The right angel relationship can give you both.
Angel capital fills the gap in start-up financing between "friends and family" who provide seed funding, and venture capital.
Although it is usually difficult to raise more than a few hundred thousand dollars from friends and family, most traditional venture capital funds are usually not able to consider investments under US $1–2 million.
Thus, angel investment is a common second round of financing for high-growth start-ups, and accounts in total for almost as much money invested annually as all venture capital funds combined.
There is evidence that angel-funded startup companies are less likely to fail than companies that rely on other forms of initial financing.
Who Are Angel Investors?
Angel investors are usually wealthy individuals that provide start-up funding to companies in exchange for part ownership in the business they are providing funding for. Angel investors take on extreme risk and expect a high rate of return on their investments.
Although they are very strict on their rate of return, they are generally more laid back when it comes to the time frame of repayment. This is a drastic difference from Venture Capitalist who are very strict on when they get their return on investment.
Angel investors also provide roughly one-seventh or more of the funding for start-up and early-growth firms in the U.S. This investment group far exceeds venture capital sources in volume.
Here is a "typical" profile of an Angel Investor:
• Angel investors prefer to invest in companies usually within one day of travel.
• An angel investor tends to invest with a group of other investors to maximize available funds while also reducing any single investors risk.
• Their typical investment range is usually from $10,000 to as much as $500,000.
• Angel investor involvement in your company is typically through board membership as a director. As a result, the angel investor does not seek as much control over decision-making as a venture capital firm would.
• While both a venture capitalist and an angel investor will seek a high rate of return on their investment, the angel investor will generally be less aggressive on valuation and is usually willing to wait longer for a payback.
Angel private investors are typically successful entrepreneurs that consist of ex CEO's and business owners. These investors offer expertise, experience, and contacts that can be invaluable to the new venture.
Although there are many angel investors across the country, they can be difficult to find.
What to Know:
Despite the relative obscurity of angels, it takes much less time, on average, to meet with and receive funds from a private investor than a venture capital firm. The due diligence (investigation of a companies principals and background) is less involved with an angel investor.
Unlike venture capitalists, angel private investors are willing to wait for longer periods of time before receiving their return on investment and they also are willing to fund investments well under $500,000 which is the minimum amount of funding that venture capitalist provide.
Angel private investors are mostly concerned with the success of the business and are willing to do what it takes to see the business grow and succeed.
Instead of requesting a large share of ownership in the company being funded, angel private investors usually will want to have an active role in the management of the company and use their experience to get the business off the ground.
Angel investors are a smart option to consider for a small to medium size business in need funding without giving up too much stake in the company.
Angel investments have extremely high risk and are usually subject to dilution from future investment rounds. As such, they require a very high return on investment.
Because a large percentage of angel investments are lost completely when early stage companies fail, professional angel investors seek investments that have the potential to return at least 10 or more times their original investment within 5 years, through a defined exit strategy such as plans for an initial public offering or an acquisition.
Current 'best practices' suggest that angels might do better setting their sights even higher, looking for companies that will have at least the potential to provide a 20x-30x return over a five- to seven-year holding period.
Angel Investor Networks
Finding the right angel investor could help you get your start-up off the ground. Angel-investor networks are a good place to start looking for funding. These national and local groups of angels meet -- formally or informally -- to discuss deals and learn about the best new business opportunities.
Each network works in a slightly different way: Some may charge fees for making presentations and some may charge a fee to apply for consideration. Some even require an official introduction to the group by an angel member while others solicit ideas via the group's Web site.
Here are some National Angel Networks to get you started:
Nonprofit national network of angel investors, foundation officers and entrepreneurs. Businesses that are reviewed by Investors' Circle members must fall into at least one of the following interest areas: community development, education, environment and energy, health, and women or minority-led business.
Focus:
Socially responsible deals.
Average investment range:
$10,000 to $6.5 million
Number of angels/investors in the network:
110+
Contact:
Investors' Circle
165 11th Street
San Francisco, CA 94103
415-255-6844
inbox@investorscircle.net
A group of Jewish industry leaders who invest in companies primarily in the United States and Israel. Operates as a business network and angel group. A select number of start-ups are selected for presentation to investors, and deals that do not qualify for presentation may still be eligible to network with investors and other businesspeople in the group. Currently has operations in Boston, California, Chicago, Connecticut, New York, and Israel.
Focus:
High tech and biotechnology.
Average investment range:
$50,000 to $1 million
Number of angels/investors in the network:
300+
Contact:
Paul Allen
San Francisco, CA
paul@tribeofangels.com
415-710-0801
Established in October 1996. A monthly meeting of private, high-net-worth investors that provide seed-level financing to start-up and early-stage firms. Since October 1996, the group has helped 87 companies find capital, including 14 in 2003 and 11 year-to-date in 2004.
Focus:
Invests in companies nationwide. Currently has investor groups based in Atlanta, Dallas, Hilton Head, Houston, Pebble Beach, San Francisco, Santa Fe, Scottsdale, St. Louis, Naples, FL and Maui.
Average investment range:
$200,000 to $1.5 million
Number of angels/investors in the network:
350
Contact:
Tarby Bryant
#4 Hawthorne Circle
Santa Fe, NM 87506
505-982-3050
tbryant@nm.net
