Once your personal resources are tapped out, it's time to start the arduous task of finding outside funding. Your search for capital will depend on what type of business you want to start and how far along you are in the start-up process. "You can borrow if your business involves assets such as equipment or inventory," says Hubbard. "If you've only got an idea, a bank probably won't lend you money." Neither will venture capitalists, he adds. "They typically come in later, when a business is reaching its next growth phase. [Without assets,] you're more likely to attract an angel."
Angels are private investors who, for a myriad of reasons, seek out new businesses in which to invest. They can be an excellent source of funds if you're willing to offer returns in the neighborhood of 25 percent. "Typically," says Hubbard, "angels invest locally so they can check on the business and learn about the entrepreneur."
While Richard Quis of PriceWaterhouseCoopers LLP in Los Angeles feels angels are more myth than reality, he nevertheless acknowledges, "They can work if they're in the industry you want to enter." For example, if you were interested in starting an e-commerce business, you might seek out an angel who made a fortune by selling baby products over the Web. A successful search could yield experienced guidance as well as funding for your start-up.
"Angels could also be devils in disguise," warns Quis, a former investment banker. "Many entrepreneurs have had their ideas stolen by angels. It's hard to protect yourself from someone who's already established and has the resources to make your idea happen in a matter of weeks."
Unfortunately, there's no concrete way to protect yourself from angel imposters even the most informal meetings and initial contracts require a certain amount of idea-sharing. If you do decide to take the chance and strike a deal with an angel investor, always proceed with caution.
Henry J. Evans, decided to take that chance when starting his printing business. In 1991, the 23-year-old Santa Fe, New Mexico, entrepreneur had developed an array of specialized services for the healthcare industry, but was unable to secure a loan from banks, loan companies, family or friends to get the business off the ground.
Fortunately, his innovative proposal so impressed one prospect-the manager of a radiology center-that Evans scored a sale and won an angel at the same time. "He recognized that I had created a new business concept for a vast market," says Evans, whose company develops and distributes printing materials nationally.
Unbeknownst to Evans, his new client had financed several high-risk ventures and was looking to invest in a sound start-up. The young entrepreneur presented his angel with a business plan and asked for $50,000 to cover start-up expenses, in return for a 25 percent stake in the business. "He agreed to provide both financing and business counseling; I would contribute my concept and do all the work," says Evans. "If the business failed, I'd owe him nothing."
This year, Evans predicts Advantage Printing Specialists Corp.'ssales will hit the $6 million mark. The company's success permitted him to repurchase the 25 percent interest from the angel in 1994. "He made a heavenly profit on his $50,000 investment," reports Evans, who's been the company's sole owner ever since.