Angel Investors

The total annual U.S. investment by Angel Investors is almost as much as the total amount invested by Venture Capitalists, but Angel Investors invest this much in about 10 times as many businesses.

A New Partner

You must be aware, that these are not lenders—they invest in your business (although they may do both), and you will have a partner whether you like it or not.

Obviously, Angels invest in high-risk ventures, and face dilution of their equity when additional rounds of funding are provided by Venture Capitalists. Consequently, these investors require a very high rate of return. This is why they demand a high-return exit strategy in your business plan—probably as high as 10 to 30 times their investment over a five to eight year holding period.

In recent years, individual Angel Investors have often formed Angel Groups, and networks of individuals or small groups. These groups exchange information and research, and occasionally two or more Angels will join resources and invest in the same business at the same time, thus spreading the risk while expanding business resources for the business owner(s).

If you ever watched the TV program "Shark Tank," you saw Angel Investors in action—Hollywood style.

How many Angel Investors are there? No one knows for sure, but some estimates go as high as 600,000 to 700,000 in the U.S., and about 4,000 to 6,000 in the U.K.

The Small Business Administration estimates there are over 250,000 of these Investors operating in the U.S., funding about 30,000 small businesses. But, because of the privacy of individual investors, very little is really known statistically.

Who Are Angel Investors?

Often they are retired business people, or affluent executives. In many cases these investors are as interested in the “process” of Angel Investing as they are in the money. They feel they have something to offer as mentors and coaches, and in many cases they fill an important need in the small business they invest in.

However, there are requirements for becoming a professional "Investor." All Angels must be "accredited" investors, as required by Regulation D of the Securities and Exchange Commission (SEC).

This is to assure that the investor is financially sophisticated and is unlikely to create long-term issues for the economy.

To be accredited, an investor must have a net worth exceeding $1 million, either individually, or jointly with their spouse…or earn an income of $200,000 per year individually—$300,000 joint income—in each of the past two years.

Who Do Angels Invest In?

They typically invest in high potential startup businesses, usually with fewer than 20 employees. They also like to invest close to home so they can keep an eye on their investment.

That means the farther from home you look for an investor, the more you reduce your chances for success.

At the same time, there are many affluent people in small communities who are not professional Angel Investors, but occasionally invest in a local business because they believe the investment is worthwhile, and they want to help their community.

These are the easiest types to work with because they usually take a passive role as an investor and might not require so much equity in your business.

Be prepared to give up equity in your company (maybe up to as much as 50%) and accept your new Investor as a board member…and quite often as a paid consultant as well.

One thing to watch out for is an aggressive personality, as they may tend to want to run your business for you.

Angel Investors will usually require you to consult with them before taking certain actions, like selling more stock or assets. They will also usually ask for anti-dilution protections to prevent you from selling stock at a lower price than they paid. This usually involves issuing more stock to the Investor to maintain their original equity ratio.

Finding Angel Investors

This process is quite a bit different than approaching lenders—although an Angel Investor could be both. Many Angels stay somewhat under the business radar, because they receive many more requests to look at deals than they could possibly be involved with.

Some networks claim they fund only 1% to 5% of the requests they receive.

That means you really need an introduction by a third party who knows both of you. This short cuts a lot of wasted activity you would otherwise go through.

So, here is how I would suggest starting:

1. You will need to incorporate your business before seeking professional investors, because all outside professional investors will want shares of stock in your business when they invest. You can get information on incorporating your business at Incorporating a Small Business.


2. Make sure your Business Plan is the best it can possibly be. If you need help with this, refer to the report on this website titled, Creating a Business Plan. This is your main selling tool, so it must be very well done to stand out above all the others an Angel Investor will receive.


3. Likewise, make sure your presentations are up to date and polished—you only get one chance to make a first impression. Make it a good one.


4. Meet with members of your Advisory Board (you do have one, don’t you?) and ask them if they have professional investor contacts they could introduce you to.


5. You should also meet with your banker early on, because a good banker should always have backup sources for money when the bank cannot be involved and they want to keep you as a customer.

   A good banker should be able to introduce you to professional investors in your local area.



6. You definitely want to meet with your attorney, and accountant, as well as colleagues to ask them if they could introduce you to any Angel Investors they know.

   Again, this is where you need your short presentations (One Absolute Rule!) polished and ready to go, because these contacts are not going to introduce you until they are convinced you know what you’re doing and that you have your act together.

• If you have a university with an entrepreneurship program near you, then call the head of the program and make an appointment to meet with them. Usually such a person can refer you to an Angel Investor in the area with interests similar to yours.


• Many universities also sponsor business incubators (there are over 1,000 in the U.S.) for high tech startups, and many of these incubators offer access to investors. You can find the closest business incubator to your location on the National Business Incubation Association (NBIA) web site. (Opens in new page).


• You should contact your local Chamber of Commerce and inquire if they had investors who were members of the Chamber. Often these folks participate in this form of local business activity.


• There are many Small Business Development Centers around the country, and your local SBA or SCORE office can direct you to the right person. Call them to see if they know of any Angel Investment groups in your area.


• You can search through a published list of Angel Investors in North America in the Angel Network., but remember, these Angels generally prefer startup companies with very high potential rates of return on their investment.


• Another Angel Directory is from the Angel Capital Association . This directory lists several hundred Angel Investors all across North America.

There is another avenue for finding Angel Investors, and that is through "paying" to get your business matched up with Investor interests. Usually the fee is quite modest, but I have not heard about very high success rates yet.

Here are a few of these services I have run across:

• Funding Post
  This is a service where you pay to list your company and what you need in the way of investment. Investors then periodically review the listings and contact the entrepreneur to discuss potential mutual interests. For more information, click here.
• Lendio
  This platform was formerly Funding Universe, but has expanded and taken on a new name—Lendio. I included it here, because it was ranked the 34th fastest-growing company in the U.S. in 2010 on the Inc. 500 list. They provide a service of matching up your financing needs with specific investor interests. For more information on this company, click here.
• vFinance
  This platform is a repository of wealthy people—investors, customers and clients. After you submit your requirements, you will need to pay for selected records of appropriate investors. The cost varies by just how wealthy you want your investor to be. For more information, click here.
• Central Investment Network
  This is a platform that connects entrepreneurs in the central U.S. (Colorado, Kansas, Missouri, Montana, Utah, & Wyoming) with investors around the world. They have a menu of costs to entrepreneurs, depending on the level of service and the amount of time you want to be listed in their database. For more information about this organization, click here.

Obviously, your Angel intended to stay around until you executed your exit strategy, so they could reap their many-times return on their original investment.

However, many things can happen on the way to your exit strategy…you may have serious personal differences with your Angel…your company may not perform as expected, thus disappointing your Angel… your exit strategy may change as your company grows…you may need venture capital, which would dilute the ownership position of your Angel…or a host of other special reasons for wanting your investor out of your business.

NOTE: A professional investor will be aware of all of this and will usually want these issues covered in a contract that protects them in any of these events. You will need your attorney to approve the original contract for your protection.

Unless you can find someone (like a Venture Capitalist) to buy out your investor, and you can reach an amicable agreement with them, you are pretty much stuck with the person you select originally—at least until you execute your exit strategy. SO CHOOSE CAREFULLY!

The best time to address these issues is in writing the contract. Professional investors are aware of the pitfalls of investing in small startup businesses and therefore, often require a clearer exit strategy for themselves than just the exit strategy in your Business Plan.

Warning!

One warning about presenting your project to a “group” of investors: some of these investor groups charge you for the privilege of presenting to them. It may be all right to pay a few hundred dollars to attend a workshop or “boot camp,” but it is absolutely NOT necessary to pay to make a pitch to investors.

This practice has become more common recently, and, in my opinion, it is unethical and you do not want to become involved with anyone who charges in this manner.

There are plenty of good honest and ethical investors around—you don’t need the shysters.

Finding an Angel Investor is usually not too difficult, but negotiating a deal with one can be more of a problem. Just remember to choose a new business partner carefully…don’t jump on the first deal that is offered by an investor.

They will be with you for a very long time, so give it serious thought.

The next step up from "Angel Investor" is Venture Capital Funding. This report is especially important if you are starting a high-profit-potential business.