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Getting Started With Angel Investing

August 17, 2010
URL: http://www.entrepreneur.com/article/52742

What it is: Angel investors might be professionals such as doctors or lawyers, former business associates -- or better yet, seasoned entrepreneurs interested in helping out the next generation. What matters is that they are wealthy and willing to invest hundreds of thousands of dollars in your business in return for a piece of the action.

How it works: Generally, the angels need to meet the Securities Exchange Commission's (SEC) definition of accredited investors. They each need to have a net worth of at least $1 million and make $200,000 a year (or $300,000 a year jointly with a spouse). 

Angel investors give you money. You sell them equity in the company, filing the investment raise with the SEC. Angel investments commonly run around $600,000. Most investments rounds also involve multiple investors, thanks to the proliferations of angel groups.

Related: What Angel Investors Want Now  

Upside: Angel investments can be perfect for businesses that are established enough that they are beyond the startup phase, but are still early enough in the game that they need capital to develop a product or fund a marketing strategy.

Many businesses receiving angel investments already have some revenue, but they need some cash to kick the enterprise to the next level. Not only can an angel investor provide this, but he or she might become an important mentor. Because their money is on the line, they will be highly motivated to see your business succeed.

Downside: You could be giving away anywhere from 10 to more than 50 percent of your business. On top of that, there's always the risk that your investors will decide that you are the business' greatest obstacle to success, and you could get fired from the company you created.

Angel investors, like venture capitalists, also like to see an end game down the road that will allow them to pocket their winnings, whether it is a public offering or your business getting acquired by another company. You might have to give up running your enterprise before you're done having fun with it.

Related: 5 Worst Mistakes Entrepreneurs Make When Pitching Angel Investors

How to get it: It used to be that angel investors were wealthy people the business owner knew. Or they might be veteran entrepreneurs who were discovered through old-fashioned networking at the local Chamber of Commerce, the area Small Business Development Center, or a trusted banker, lawyer or accountant.

These days, though, angel groups are proliferating, offering plenty of mentoring and coaching on top of the money provided.

The Overland, Kan.-based Angel Capital Association (ACA) has an online listing of angel groups that are members in good standing, as well as organizations affiliated with the ACA. 

Other websites to check out include AngelList and MicroVentures.

Related: 3 Things You Must Know Before Pitching Investors