The State of Small-Business Funding

Send Me an Angel

Entrepreneurs who prefer exchanging equity for cash increasingly find their way to angel investors. Although VCs get more attention, recent studies show angels provide funding to more entrepreneurs, says Marianne Hudson, director of the angel initiative at the Kauffman Foundation in Kansas City, Missouri. Citing statistics from the University of New Hampshire's Center for Venture Research, she says that in 2005, angels pumped $23.1 billion into 49,500 firms. That's compared to $21.7 billion invested by VCs in fewer than 3,000 firms, according to the "MoneyTree Report" by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Financial.

As their numbers grow, angels are changing the way they invest. "You're seeing growing sophistication," Hudson says. Angels increasingly join together, she adds, and as groups they can supply larger sums as well as more nonfinancial assistance, such as advice and contacts with customers and suppliers. They are stricter about screening but also more realistic about what they're buying. "They are not asking for too much ownership of the companies or too many rights to impact decision making," Hudson says.

If you want angel money, build a big Rolodex--and use it, Hudson advises. "Angels are more likely to invest in a company that was referred to them by somebody they know and trust," she says. "It's critical for an entrepreneur to understand that."

Eighteen-year-old Dave Cook understands. In April 2005, the Pennington, New Jersey, high school student and his 16-year-old sister had an idea for a website where teens could post photos and other memorabilia. Over dinner one night, he described the idea to his brother, Geoff, who had started his own dotcom company in 1997 and sold it in 2002. "As soon as I heard the idea, I thought it was very cool and put in $250,000," Geoff, 28, says. "We got another $250,000 from another angel investor whom I had worked with on my previous company."

"We needed [the money] to grow new users," explains Dave. "We had 13 servers, and [that] gets pretty pricey. We also have a lot of programmers based in India, and a lot of it goes to programmers." Within a few months of MyYearbook.com's September 2005 national launch, thousands of teens were signing up for the free service every day. Now the company needs capital to pay for expansion.

The company still lacks revenue, although Geoff is talking with national advertisers about using MyYearbook.com for word-of-mouth referral campaigns. He is confident they'll get funding. "It really couldn't be easier," he says. "We have gotten multiple offers to invest $8 million."

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This article was originally published in the July 2006 print edition of Entrepreneur with the headline: The Money Market.

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