Make no mistake about it, there's an art to raising angel capital. It's not harder or easier than raising venture capital--it's simply different. Here's how:
1. Make sure the investors are accredited. Accredited is legalese for "rich enough to never get back a penny." You can get into trouble for selling stock to the proverbial little old lady in Florida, so don't. And get a good corporate finance attorney (as opposed to your aunt, the divorce lawyer) to advise you about the process of seeking investments.
2. Make sure they're sophisticated investors. Sophisticated angel investors have knowledge and expertise in your industry--they'll have "been there and done that." Sure, you want angels' money, but you also want their expertise. If you want to raise venture capital in later rounds, it will be much harder if you show up with a long list of unsophisticated investors.
3. Don't underestimate them. If I had a nickel for every time an entrepreneur told me she was going to raise angel capital because it was easier than raising venture capital, I wouldn't have to run ads in my blog. When approaching angels, do all the same things you would do when approaching venture capitalists. The days of angel investors as easy marks are gone forever--if they ever existed. And angels care as much about liquidity as venture capitalists do--maybe even more because they're investing their personal, after-tax money.
4. Understand their motivation. Angel investors differ from venture capitalists because typically, angel investors have a double bottom line. They've made it, so they want to pay back society by helping the next generation of entrepreneurs. Thus, they're often willing to invest in less proven, riskier deals to help entrepreneurs get to the next stage. I know many nice venture capitalists, but I don't know that any of them are motivated by the desire to pay back society.
5. Enable them to live vicariously. One of the rewards of angel investing is the ability to live vicariously through an entrepreneur's efforts. Angels want to relive the thrills of entrepreneurship while avoiding the firing line. They enjoy helping you, so seek their guidance frequently. By contrast, most venture capitalists only want to get involved when things are going really well or really poorly.
6. Make your story comprehensible to the angel's spouse. The usual membership of an angel's "decision-making committee" consists of one person: a spouse. So, if you've got a "client-server open source OPML carrier class enterprise software" product, you must make it comprehendible to the angel's husband when he asks, "What are we investing $100,000 in?"
7. Sign up people the angel has heard of. Angel investors are also motivated by the social aspect of investing with buddies in startups run by bright people who are changing the world. Even if the other investors aren't buddies, investing side by side with well-known angels is quite attractive. If you get one of these guys or gals, you're likely to attract a whole flock of other angels, too.
8. Be nice. More often than venture capitalists, angel investors fall in love with entrepreneurs. The entrepreneurs may remind the investors of their sons or daughters, or even fill the position of the sons or daughters they never had. Venture capitalists will sometimes invest in a schmuck as long as that schmuck is a proven moneymaker. If you're seeking angel capital, then you're probably not a proven moneymaker, so you can't get away with acting like a schmuck. Be nice until you are proven--although I hope that even when you are proven, you'll still be a mensch.
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