Definition: An individual who invests his or her own money in an
entrepreneurial company
Originally a term used to describe investors in Broadway shows,
"angel" now refers to anyone who invests his or her money in an
entrepreneurial company (unlike institutional venture capitalists,
who invest other people's money). Angel investing has soared in
recent years as a growing number of individuals seek better returns
on their money than they can get from traditional investment
vehicles. Contrary to popular belief, most angels are not
millionaires. Typically, they earn between $60,000 and $100,000 a
year. Which means there are likely to be plenty of them right in
your own backyard.
Angels come in two varieties: those you know and those you don't
know. They may include professionals such as doctors and lawyers;
business associates such as executives, suppliers and customers;
and even other entrepreneurs. Unlike venture capitalists and
bankers, many angels are not motivated solely by profit.
Particularly if your angel is a current or former entrepreneur, he
or she may be motivated as much by the enjoyment of helping a young
business succeed as by the money he or she stands to gain. Angels
are more likely than venture capitalists to be persuaded by an
entrepreneur's drive to succeed, persistence and mental
discipline.
Angel investors vary widely, but they are typically willing to
accept risk and demand little or no control in return for the
chance to own a piece of a business that may be valuable
someday.
Angels can be classified into two groups: affiliated and
nonaffiliated. An affiliated angel is someone who has some sort of
contact with you or your business but is not necessarily related to
or acquainted with you. A nonaffiliated angel has no connection
with either you or your business. It makes sense to start your
investor search by seeking an affiliated angel since he or she is
already familiar with you or your business and has a vested
interest in the relationship. Begin by jotting down names of people
who might fit the category of affiliated angel:
Professionals. These include professional providers of
services you now use--doctors, dentists, lawyers, accountants and
so on. You know these people, so an appointment should be easy to
arrange. Professionals usually have discretionary income available
to invest in outside projects, and if they're not interested, they
may be able to recommend a colleague who is.
Business associates. These are people you come in contact
with during the normal course of your business day. They can be
divided into four subgroups:
- Suppliers/vendors. The owners of companies
who supply your inventory and other needs have a vital interest in
your company's success and make excellent angels. A supplier's
investment may not come in the form of cash but in the form of
better payment terms or cheaper prices. Suppliers might even use
their credit to help you get a loan.
- Customers. These are especially good
contacts if they use your product or service to make or sell their
own goods. List all the customers with whom you have this sort of
business relationship.
- Employees. Some of your key employees might
be sitting on unused equity in their homes that would make
excellent collateral for a business loan to your business. There's
no greater incentive to an employee than to share ownership in the
company for which he or she works.
- Competitors. These include owners of
similar companies you don't directly compete with. If a competitor
is doing business in another part of the country and doesn't
infringe on your territory, he or she may be an empathetic investor
and may share not only capital, but information as well.
The nonaffiliated angel category includes:
Professionals. This group can include lawyers,
accountants, consultants and brokers whom you don't know personally
or do business with.
Middle managers. Angels in middle management positions
start investing in small businesses for two major reasons--either
they're bored with their jobs and are looking for outside
interests, or they're nearing retirement or fear they're being
phased out.
Entrepreneurs. These angels are (or have been) successful
in their own businesses and like investing in other entrepreneurial
ventures. Entrepreneurs who are familiar with your industry make
excellent investors.
Approaching affiliated angels is simply a matter of calling to
make an appointment. To look for nonaffiliated angels, try these
proven methods:
Advertising. The business opportunity section of your
local newspaper or The Wall Street Journal is an excellent place to
advertise for investors. Classified advertising is inexpensive,
simple, quick and effective.
Business brokers. Business brokers know hundreds of
people with money who are interested in buying businesses. Even
though you don't want to sell your business, you might be willing
to sell part of it. Since many brokers aren't open to the idea of
their clients buying just part of a business, you might have to use
some persuasion to get the broker to give you contact names. You'll
find a list of local business brokers in the Yellow Pages under
"Business Brokers."
Telemarketing. This approach has been called "dialing for
dollars." First you get a list of wealthy individuals in your area.
Then you begin calling them. Obviously, you have to be highly
motivated to try this approach, and a good list is your most
important tool. Look up mailing-list brokers in the Yellow Pages.
If you don't feel comfortable making cold calls yourself, you can
always hire someone to do it for you.
Networking. Attending local venture capital group
meetings and other business associations to make contacts is a
time-consuming approach but can be effective. Most newspapers
contain an events calendar that lists when and where these types of
meetings take place.
Intermediaries. These are firms that find angels for
entrepreneurial companies. They're usually called "boutique
investment bankers." This means they are small firms that focus
primarily on small financing deals. These firms typically charge a
percentage of the amount of money they raise for you. Ask your
lawyer or accountant for the name of a reputable firm in your
area.
Angels tend to find most of their investment opportunities
through friends and business associates, so whatever method you use
to search for angels, it's also important to spread the word. Tell
your professional advisors and people you meet at networking
events, or anyone who could be a good source of referrals, that
you're looking for investment capital. You never know what kind of
people they know.