From the May 2002 issue of Entrepreneur

Raising money ranks right up there with root canals and tax audits as one of those not-so-fun, yet necessary, activities in life. And the dotcom bust, tumultuous money markets and slowing economy certainly haven't made the money hunt any easier.

But that's the bad news. The good news? "There's definitely money out there, and companies that have good business models and combine that with great management teams can certainly get capital today, from both angels and VCs," says Brian Hill, co-author of Attracting Capital From Angels.

The tough part, of course, is getting the money. But experts offer a few tips to help ensure success. First, you have to network with everyone you know, such as family, friends, your lawyer, the neighborhood grocer--anybody who will listen to you talk about your idea. You'll also need to perfect your elevator pitch; two minutes is probably the most time you'll initially get with an angel.

And the companies with the best chance of obtaining angel funding in 2002 are those that already have a product or service on the market or are very near marketability. Those whose companies have made it to the break-even point have an even better shot at growth capital, say experts. So if you're in the early stages of a start-up, you're probably not going to get angel financing just yet--you need to be a bit further along.

Why? Investors are looking for entrepreneurs who have gone back to the bootstrapping way of starting a business--entrepreneurs who have used their own seed money, created a business plan, acquired customers and set up distribution channels. "[Many entrepreneurs] are thinking about doing those things, but they want to get someone else's money to go try it and see if it works," says Cal Simmons, co-author of Every Business Needs an Angel. "I would much rather talk to an entrepreneur who has already put his money and his effort into proving the concept. And I think most angels I know feel the same way right now."


Winging it

For more information and leads to angels, check your local chambers of commerce, SBDCs and other small-business groups as well as the following Web sites and books:

1. Every Business Needs an Angel: the official site for John May and Cal Simmons' book is www.everybusinessneedsanangel.com

2. The Capital Connection: a collection of funding resources and expert directories

3. Angel Investing: Matching Startup Funds with Startup Companies--A Guide for Entrepreneurs, Individual Investors and Venture Capitalists by Robert J. Robinson and Mark Van Osnabrugge

4. Financing the New Venture: A Complete Guide to Raising Capital From Venture Capitalists, Investment Bankers, Private Investors and Other Sources by Mark H. Long

Networking Your Way Into (Investment) Heaven

These are the kinds of steps Tori Stuart took when she looked for angels to fund Zoe Foods, her Newton, Massachusetts, natural foods company. She networked with everyone, getting the buzz out on the street about Zoe Flax & Soy Granola, her natural remedy for the symptoms of menopause. It also helped to have a product that already had enthusiastic customers supporting it. "The challenge in raising money is communicating [about our company and product] because we're in the natural foods sector," says Stuart, 36. "[Not all] investors are natural foods consumers." Getting them to believe in a product they weren't familiar with presented its own set of unique challenges.

But starting to network early--and forging connections long before she even needed capital--is ultimately what helped Stuart and her management team raise $1.2 million even at the height of 2001's economic difficulties. "Start months before you need to," says Stuart. "And to some extent, you have to put the economy out of your mind."

So the bottom line in the angel funding arena these days is simple--it's tougher to get capital, yes, but there is still money to be had out there. "Angels by nature tend to be optimistic," says Simmons, "but they just want more assurances today than they did a few years ago. That's OK--I think [it] helps everybody. But there are still plenty of angels out there looking for deals to invest in. So entrepreneurs who do their homework and prepare--they can get financed."

Coming soon

We asked these authors what they feel the state of angel financing is right now and where they see it moving by the end of 2002.

  • "Uncertainty. There's a lot of talk about valuations being down and now being a great time to make investments. I think intellectually, that's what most people feel. Emotionally, it's very hard to pull the trigger. [So entrepreneurs] continue to be really frustrated that angels are willing to talk and look at deals and presentations, but it's very hard to get them to write a check. I think it's improving, but it's a slow trickle. It's not a flood of people racing back into the market."
    -Cal Simmons, co-author of Every Business Needs an Angel
  • "It's gone back to where it was before the period of excess in the late 1990s and 2000, when we all got swept up in venture capital and angels. I think we're sadder but wiser, having gone through the last couple years, so I see it [going] back to a more growing-businesses stage [rather] than a financial-engineering stage."
    -John May, co-author of Every Business Needs an Angel
  • "I think it's one of the best times to be an angel investor and an entrepreneur, which might be contrary to what [some] people think. The quality of the companies looking for capital has improved. There are fewer companies, but they're better companies."
    -Dee Power, co-author of Attracting Capital From Angels