(YoungBiz.com) - Sometimes, you've got the right business idea at the right time and in the right place--but you're short on that one key ingredient: cash. That's can make you feel like nothing short of a miracle will get your business off the ground.
Enter angel investors. That's exactly who helped to get a couple of awesome businesses off the ground for 'treps Abbey Fleck and Kristin Hrabar.
Angel investors are individuals or organizations that provide funding to get businesses through their start-up and initial development phases, often in exchange for a portion of ownership in the businesses. As in Fleck and Hrabar's cases, angels may even be friends or family members.
Abbey Fleck of White Bear Lake, Minnesota, was just an average 8-year-old kid--with a hot idea. One Saturday morning as she watched her dad cook up some bacon in the microwave, she noticed it was dripping in grease. There must be a better way, she thought to herself.
By the end of the day, she was pretty sure she had found it. Fleck drew a sketch of her idea and showed it to her dad. After some trial and error, the two came up with the Makin Bacon dish.
Big retailers like Kmart and Wal-Mart turned the Flecks away at first, but they struck up a deal with Armor bacon. Eventually they got their original wish--a distribution agreement with a national chain store: Wal-Mart. But they would need a lot of cash to make the 100,000 dishes Wal-Mart required.
That's where Fleck's grandfather, George Fleck, came in. He took out a loan on his farm to give Abbey and her dad the money they needed. A de F Inc., which Abbey co-owns with her dad, sells around 640,000 Makin Bacon dishes a year and brings in royalties of more than $1 million every year.
Kristin Hrabar, 16, of Aberdeen, New Jersey, was in the third grade when she invented the illuminated nut driver, a special nut driver with a clear shaft and a light mounted in the handle. She spent the next couple years perfecting her idea and taking care of business legalities along the way, such as obtaining a patent and a trademark for her new company, LaserDriver Tools. Then it was time for Hrabar to get down to business. To begin manufacturing her product, however, she needed cash.
Last winter, several angel investors in Hrabar's family decided to help bring LaserDriver Tools to market. Several stores in Aberdeen now carry LaserDriver Tools, and a Web site serves out-of-town customers.
A Piece of the Pie
Family members and friends who come forward as angel investors usually have their own incentives for doing so: They want to see you succeed.
But what do other angel investors get out of it? That depends upon the deal you strike. Angel investors expect to see their investment significantly appreciate in value to the point when a bank, venture capital fund or acquiring company will take over and help the company grow. As part of the agreement for lending you money, angel investors may:
- Ask to see detailed financial statements every few weeks or every quarter.
- Require a seat on the board of directors.
- Hold you to a strict set of sales targets for the first couple years.
- Require shares of stock in the company.
- Want to be actively involved in company management.
Know going into the deal what you are willing to give up--and what you are not--in exchange for some cash flow to get your business up and running. And, whether your angel investor is a friend, relative or complete stranger, be sure to draw up an agreement with the help of an attorney.
The best place to find angels is within your current circle of contacts: family members, friends and professional associates. Other places to look are your chamber of commerce and your local bank.
Here are a few other organizations to help you get started:
- ACE-Net, a not-for-profit listing service developed by the Small Business Administration, designed to facilitate the flow of information between entrepreneurs and investors.
- American Venture magazine provides insight and advice on angel investors. Contact them at (503) 221-9981 or www.avce.com for a $15, one-year subscription of four issues.
- Angel Money, www.angelmoney.com
- Internet Angels, (212) 333-8722, www.internetangels.com
For the entrepreneur willing to give up some equity and perhaps share some decision-making, angel investors can provide an excellent funding source for your company's development.