If your company is too new, too risky and unproven, or too offbeat to qualify for traditional bank financing and attract venture capitalists, you may want to look for an angel. An angel is a private investor, often a successful entrepreneur, who invests in small businesses close to home for a variety of economic and personal reasons. Usually, angels are friends, relatives, or colleagues. Successful entrepreneurs, especially retired ones, are especially likely to become angels.
Although the figures vary widely, angels are believed to provide billions of dollars in capital to entrepreneurs every year. Based on demographics, studies characterize angels as follows:
- They are wealthy
- They are usually self-made as opposed to inherited wealth
- Many angel investors are in their sixties, though a growing number of young successful entrepreneurs are going into angel investing themselves.
Angels prefer to invest in companies they are familiar with. They usually seek out small and growing companies in their own industry. Many angel investors, however, prefer to invest in technology-based businesses and inventions. You are more likely to attract an angel investor if you have developed a new platform for video marketing, than if you are starting a day care business.
How do you find an angel for your business? Here are some tips:
1. The first place to look for is among your business associates.
You have a greater chance of securing financing from people who knows you. Then ask your business associates to ask their acquaintances. However, the farther the relationship and the lesser the prospective angel knows you, the lesser the chances of securing the investment unless they have a unique understanding of your product.
2. Network, network and network.
Join a professional organization or trade group for your industry. Begin attending meetings on a regular basis. This is the best way to get acquainted with successful business owners in your field.
3. Stay local.
You don’t need to go beyond your geographic area to find investors willing to take their chances with your venture.
4. Discreetly inquire about people who appear to be the most successful members of your industry.
Pitch the idea to your lawyer or accountant – they may be interested or know someone who could be interested. They may have clients who frequently invest in a new and growing business.
4. Research on the Internet.
Some sites provide listings of angel investors per geographical location, while others provide focused advice on getting investors for your small business. Check out the following sites:
- Angel Capital Association http://www.angelcapitalassociation.org
- Angel’s Forum http://www.angelsforum.com
- Band of Angels http://www.bandangels.com
- Common Angels http://www.commonangels.com
- Keiretsu Forum http://www.k4forum.com
- Launchpad Venture Group http://www.launchpadventuregroup.com
- New World Angels http://www.newworldangels.com
- New York Angels http://www.newyorkangels.com
- vFinance Directory of Angel Investors: http://www.vfinance.com
However, the rule is always to raise money at the right time. Convincing angels (or anyone else) to part with their cash to support your venture takes a lot of time and hard work. Be sure to dedicate enough time and budget in your search for financing.
Once you find a prospect, send a letter requesting a short meeting to discuss the proposal. A more effective approach is to be personally introduced to the angel investor by a common friend. People are more inclined to be receptive to offers from other people if the request come from people whom they trust.
In the event that the prospective angel shows interest in your business idea, make sure that you have prepared a well-researched detailed business plan. Your plan should emphasize why you need additional financing and exactly what you plan to do with the money. Write an executive summary for the plan that spells out in one page why someone should invest money in your business. Explain too, how you can repay the money and when. Better yet, have presentation materials ready based on your business plan in order to have a more effective discussion with your prospective investor. You want to appear relaxed, confident and knowledgeable as possible.
If the investor is interested, bring in your lawyer and accountant to the negotiations. Informal investors usually invest from $10,000 to $100,000 in each venture. While angels may be able to invest considerable money in your venture without requiring the kind of documentation that other investors do, put your arrangement in writing to reduce misunderstandings.
Angels may prefer to make straight loans at rates comparable to banks or slightly higher rate. They generally expect to lend their money from three to seven years, with some guaranteed exit provisions such as mandatory buy-out. Others may want to be repaid in stock if your company eventually goes public. Be sure to tailor the financial arrangements to fit your angel’s needs.
Angels can also provide you, not just with money, but guidance, advice and a mentor relationship. Also called “advisory investors,” they are generally not interested in controlling the business, but may require you to meet certain business goals or follow certain business practices. If possible, encourage your angel to become a member of your informal advisory board. Many angels like to keep a close eye on their money; plus, they can offer you invaluable advice. If your angel is well connected in the local business community, he or she may help you find additional investors, introduce you to a banker or an attorney, or bring in new customers. An angel may also help you gain membership in a club or professional society that will benefit your business.
Remember that every relationship is different. The key to success is doing everything you can to increase your angel’s comfort level so the person’s investment and relationship with you and your business will be longstanding and profitable.
Recommended Books on Angel Financing and Angel Investors:
- Angel Financing for Entrepreneurs: Early-Stage Funding for Long-Term Success
- Finding an Angel Investor in a Day: Get It Done Right, Get It Done Fast
- Getting in the Game: Guiding Your Startup Through the World of Venture Capital and Angel Investors
- Attracting Capital From Angels: How Their Money – and Their Experience – Can Help You Build a Successful Company
- Early Exits: Exit Strategies for Entrepreneurs and Angel Investors (But Maybe Not Venture Capitalists)
- Pros and Cons of Financing a Business
- How Angel Investors Can Benefit a Small Business
- What Investors Want Before Funding a Business
- How to Raise Money to Start a Business
- Why Investors Say “No”