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Definition or Explanation: Working with angel investors means acquiring venture capital from individual investors. These individuals look for companies that exhibit high-growth prospects, have a synergy with their own business or compete in an industry in which they have succeeded.
Appropriate For: Early-stage companies with no revenues or established companies with sales and earnings. Companies seeking equity capital from angel investors must welcome the outside ownership and perhaps be willing to relinquish some control. To successfully accommodate angel investors, a company must also be able to provide an "exit" to these investors in the form of an eventual public offering or buyout from a larger firm.
Supply: The supply of angel investors is large within a 150-mile radius of metropolitan areas. The more technology driven an area's economy, the more abundant these investors are.
Best Use: Runs the gamut, from companies developing a product to those with an established product or service for which they need additional funding to execute a marketing program. Also, angel investors are appropriate for companies that have increasing product or service sales and need additional capital to bridge the gap between the sale and the receipt of funds from the customer.
Cost: Expensive. Capital from angel investors is likely to cost no less than 10 percent of a company's equity and, for early-stage companies, perhaps more than 50 percent. In addition, many angel investors charge a management fee in the form of a monthly retainer.
Ease of Acquisition: Angels are easy to find but sometimes difficult to negotiate with because they usually do not invest in concert and may demand different terms.
Range of Funds Typically Available: $300,000 to $5 million.
Angel investors are at once difficult and easy to find. The situation is analogous to searching for gold. Generally, it's difficult to find, but once you hit a vein...all your hard work pays off in a big way. Here are the places angels might be hiding:
- Universities: According to Bob Tosterud, Freeman Chair for Entrepreneurial Studies at the University of South Dakota, angel investors tend to hover near university programs because of the high level of new business activity they generate. He advises that if you are looking for money, call the nearest university that has an entrepreneurship program, and make an appointment to speak with the person who runs it. Generally, he says, such people can point you in the direction of angels.
- Business incubators: According to the National Business Incubation Association (NBIA), there are about 1,000 business incubators in North America. At first blush, incubators appear to be the mere bricks and mortar facilities that offer entrepreneurs reasonable rents, access to shared services, exposure to professional assistance and an atmosphere of entrepreneurial energy. But according to NBIA president and CEO Dinah Adkins, many business incubators offer formal or informal access to angel investors.
- Venture capital clubs: The tremendous wealth created through the commercialization of technology, as well as the robust stock market of the 1990s, have resulted in a large number of angel investors who have begun to formalize their activities into groups or clubs. These clubs actively look for deals to invest in and their members want to hear from entrepreneurs looking for capital.
- Angel confederacies: Some angels, shunning the formality of a venture capital club, band together in informal groups that share information and deals. Members of the group often invest independently or join together to fund a company. So-called confederacies are not easy to find, but once you locate one member, you gain access to them all, a number that could top 50 investors.
Here are 10 action steps you can take to find angel investors in your area:
2. Call a Small Business Development Center near you and ask the executive director if he or she knows of any angel investor groups. Ask the SBA if you don't know where an SBDC is.
3. Ask your accountant. If your accountant doesn't know, call a Big Four Accounting Firm and ask for the partner who handles entrepreneurial services. Ask him or her to point you in the right direction.
4. Ask your attorney. Lawyers always know who has money.
5. Call a professional venture capitalist and ask if he or she is aware of an angel investor group.
6. Contact a regional or state economic development agency and ask if anyone there knows of an angel investor group.
7. Call the editor of a local business publication and ask if he or she knows of any groups. These professionals often write about such activity.
8. Look at the "Principle Shareholders" section of initial public offerings (IPO) prospectuses for companies in your area. This will tell you who has cashed out big.
9. Call the executive director of a trade association you belong to. Ask if there are any investors who specialize in your industry.
10. Ask your banker. If you do business at a small bank, ask the president of the institution. If yours is a larger commercial bank, ask your lender. If you do not have a lender, ask for a lender who works with loans of $1 million or less. A good small-business banker knows of such groups because companies that have received an equity investment are good candidates for a loan.
Excerpted from Financing Your Small Business. Buy it today.