Michael Cornelius, co-founder of TV Plus Inc., is a case straight from the annals of entrepreneurship. In the one year he's spent getting his company up and running, he's taken a second mortgage on his house, maxed out seven credit cards and given up a year of salary.
Other than his faith in himself--and in his partner, Greg Hall, 51--Cornelius is betting on America's continuing fixation with watching television, and more specifically, on the fact that the more TV Americans watch, the more they want to know what's on the tube. And the more they want to know what's on, the greater the demand for the kind of weekly TV guide TV Plus is publishing in the Tampa Bay area of Florida. The key to the business, says Cornelius, is high quality but inexpensive production, which allows advertisers to roll out advertising programs with the kind of frequency they couldn't hope to match with that other TV-schedule publication.
Now that Cornelius has all the operational kinks worked out, he envisions wider horizons for his company. "We see a national market for our publication, which we can exploit through franchising," says the 49-year-old entrepreneur.
But, as is often the case, the problem comes down to money. To take the company where he knows it can go, Cornelius figures TV Plus needs $125,000 for working capital and start-up funding for his franchise program. Unfortunately, with only one year under its belt, TV Plus isn't exactly "bankable." "Banks aren't an option," Cornelius concedes.
But neither are the investors at the other end of the spectrum: institutional venture capitalists. The fact is that most institutional investors--if they have, say, $50 million to invest-- don't want to shell it out $125,000 at a time. They want to do 10 deals for $5 million a pop.
The middle-of-the-road option--and the one which is best for entrepreneurs like Cornelius--is angel investors. The reasons are simple: Angel investors are numerous and easy to find; they add value to your business and invest for reasons other than economics; and they're often connected to additional money. Angel investors are, perhaps in 99 percent of all situations, right for your business.
David R. Evanson's newest book about raising capital is called Where to Go When the Bank Says No: Alternatives for Financing Your Business (Bloomberg Press). Call (800) 233-4830 for ordering information. Art Beroff, a principal of Beroff Associates in Howard Beach, New York, helps companies raise capital and go public.
The number of angel investors in the economy is a well-known fact: 250,000 or so angel investors in the United States pump some $20 billion into the nation's businesses each year, yada, yada, yada. Where this number takes on real significance, however, is in comparison to the alternatives. For instance, Pratt's Guide to Venture Capital Sources, the bible of institutional venture capital, lists more than 1,300 venture capital firms. But of this august congress, only 14 percent or so indicate a willingness to invest in early-stage firms.
Among investment bankers who do initial public offerings (IPOs), the numbers are even more discouraging. For instance, the Securities Industry Association, the big trade group of investment banks and brokerage firms, boasts almost 800 members. In truth, however, only a small fraction of these firms will even consider an IPO. An even better indication of the state of investing is provided by the Regional Investment Bankers Association (RIBA), a trade group consisting of regional and boutique brokerage firms that typically underwrite offerings of $5 million to $20 million. Of RIBA's 150 members, perhaps half originate and underwrite IPOs, with the rest acting as brokers and market makers. So what's left? About 75 investment bankers that will consider IPOs for emerging-growth companies.
So where should Cornelius spend his precious time looking for capital? Among the handful of finicky investment bankers and venture capitalists who seem predisposed to saying no, or among the 250,000 angel investors who have a wide variety of interests and who are actively looking for deals?
Hide & Seek
It's not just that angel investors are the best kind of investors for most private companies; they're also more visible than they've ever been. There's so much wealth in the economy from a robust stock market and 15 years of IPOs that angels are coming out of the woodwork. The prominence of angels, typically shy about publicity, has grown to such a level that they merited a recent feature article in U.S. News and World Report.
Cornelius admits that although angel investors are everywhere, he hasn't bumped into any yet. But then again, with respect to his search for capital, he's at the beginning of the journey. Fortunately, there are now more formal approaches to finding angels than ever before. Avenues include: universities with active entrepreneurship programs; business incubators; ACE-Net (https://ace-net.sr.unh.edu), an Internet-based matching service; networks affiliated with chambers of commerce; and last, but certainly not least, referrals from such professionals as accountants and attorneys.
More Than Just Money
Another reason angel investors are right for many growing companies is that they often add value to a business. Their experience and expertise can be priceless to those entrepreneurs who are learning the ropes as they go.
"We're definitely looking for the kind of investor who can provide some advice," says Cornelius. He believes his background in direct marketing and his partner's financial management experience provide an exceptional foundation for their business. But at the same time, he says, "You tend to get so involved in your business, you don't see what good, interested advisors can see right away."
After a bank lends you money, for better or for worse, it usually stays out of your way. Angel investors, on the other hand, are often tough-as-nails men and women who got rich by growing successful businesses and then either selling them or structuring them in such a way that the businesses no longer need their full-time attention.
Other angels are actually downsized executives with big wads of cash from severance packages. Getting money from these investors can work great--if they can make the transition from a professionally managed to an entrepreneurially managed (read: chaotic) organization. Still other angels are professionals, such as accountants and lawyers, who want to invest in a business but are also looking to develop new clients. It's important to decipher what additional goals angels have so you can take advantage of the benefits they offer beyond investment capital.
Wealth of Experience
Here are perhaps two of the best reasons why angel investors make sense for most businesses: 1) Angels invest for reasons other than pure economics, and 2) they tend to invest in industries they know or have worked in.
Here's an example of how these interrelated dynamics can work for you. A professional in New York City was contemplating chucking it all to start a sailing school, but he needed capital. Although this entrepreneur's idea might generate a nice profit, chances are it's not going to generate the kind of double-digit return that professional venture capitalists seek. In addition, the words "sailing school" aren't listed as an investment preference in any venture capital directory.
There are, however, entrepreneurs who have made it big in the boating industry and who may be motivated to invest, or at least hear an investment proposal, for a deeply rooted psychological reason: They want to provide a resource for others that they wish they'd had when they were bootstrapping their way to the top. So strong is this motivation that angels will often lower their required rate-of-return hurdles--not to the point where these returns challenge common sense, but clearly to the point where more companies can meet them--and a deal becomes viable.
More Money, Please
A final--and important--reason to seek out angel investors is that they're frequently connected to additional capital, which you can access in several ways. First, if you can make good on the initial investment, then the same investor might come back with further financing when needed. Second, chances are angel investors have made other individuals who invested in previous ventures wealthy as well. These other investors are now within your reach. Third, if your company can grow to the size and scale where an IPO or a big institutional venture capital placement is viable, you can frequently access these investors through your angel investors, who may have worked with them in previous deals.
In the financing of companies, it would appear that economics rule the day. But in fact, economics often play second fiddle to more intangible contributions. In this way, angels can truly be a godsend.
Next month in "Raising Money," we'll tell you how to find an angel investor.
TV Plus Inc., (727) 895-7355, fax: (727) 895-7587