When it comes to business financing, the past two years have had a Wild West feel to them. There were companies funded by venture capitalists and taken public in a matter of months, firms whose valuations soared heavenward at light speed, and entrepreneurs in their twenties cashing in on ventures they founded in their dorm rooms.
Then reality hit. Venture capitalists slammed on the brakes, and banks snapped their purse strings shut. Now hundreds of young companies and would-be entrepreneurs are left with start-up and expansion hunger pangs and no clear idea how to satisfy them.
While firms that are more established can turn to the $5 trillion in nonventure private equity available from brokers/dealers, private bankers and qualified institutional buyers, start-ups-especially those not located in the traditional investment hotbeds-will likely need to fall back on an old standby: the $30 billion angel investor arena.
The good news is, today's angel investors are much easier to find than their predecessors, because a growing number of them have created formal and informal networks. Even more encouraging is that a number of these groups are popping up in nontraditional regions.
According to Carol Sands, founder of Angels' Forum LLC in Palo Alto, California, these angel funds or networks fall into three basic categories:
1. There are "social clubs," which bring angels together to view a high volume of companies and then allow investors to execute their own investment deals. This format is a little less personal, and it places the onus on entrepreneurs to make presentations that stand out.
2. There are those that are organized and run like funds, where angels put up a certain dollar amount upfront and one individual manages the process and selects companies to present at regular meetings. Sands says these groups typically invest as a single entity but don't do follow-up work with the company; their only interest is the cash-investment relationship.
3. The final format, into which Angels' Forum falls, is a fund that utilizes a venture capital structure and process, but instead of investing other people's money, they invest their own. These groups invest in companies as a single unit, typically require a board seat and provide continuous assistance. For instance, at Beverly Hills, California-based Idealflow Angel Fund LLC, which targets technology companies nationwide, assistance comes in the form of a "virtual incubator."
These are the basic structures of the new networks, but there are also hybrids like Arizona Angels Investor Network Inc. According to Greg Cobb, managing director of the Scottsdale, Arizona, network, entrepreneurs interested in securing funding from his group must find a lead investor, who doesn't have to be a member of the network. That person handles due diligence, negotiates on behalf of interested investors, and is responsible for taking care of the LLC formed to invest in the business.
For more information on nontraditional angel financing, check out "Angel Funds and Networks".