Angel Investor

Originally a term used to describe investors in Broadway shows,”angel” now refers to anyone who invests his or her money in anentrepreneurial company (unlike institutional venture capitalists,who invest other people’s money). Angel investing has soared inrecent years as a growing number of individuals seek better returnson their money than they can get from traditional investmentvehicles. Contrary to popular belief, most angels are notmillionaires. Typically, they earn between $60,000 and $100,000 ayear. Which means there are likely to be plenty of them right inyour own backyard.

Angels come in two varieties: those you know and those you don’tknow. They may include professionals such as doctors and lawyers;business associates such as executives, suppliers and customers;and even other entrepreneurs. Unlike venture capitalists andbankers, many angels are not motivated solely by profit.Particularly if your angel is a current or former entrepreneur, heor she may be motivated as much by the enjoyment of helping a youngbusiness succeed as by the money he or she stands to gain. Angelsare more likely than venture capitalists to be persuaded by anentrepreneur’s drive to succeed, persistence and mentaldiscipline.

Angel investors vary widely, but they are typically willing toaccept risk and demand little or no control in return for thechance to own a piece of a business that may be valuablesomeday.

Angels can be classified into two groups: affiliated andnonaffiliated. An affiliated angel is someone who has some sort ofcontact with you or your business but is not necessarily related toor acquainted with you. A nonaffiliated angel has no connectionwith either you or your business. It makes sense to start yourinvestor search by seeking an affiliated angel since he or she isalready familiar with you or your business and has a vestedinterest in the relationship. Begin by jotting down names of peoplewho might fit the category of affiliated angel:

Professionals. These include professional providers ofservices you now use–doctors, dentists, lawyers, accountants andso on. You know these people, so an appointment should be easy toarrange. Professionals usually have discretionary income availableto invest in outside projects, and if they’re not interested, theymay be able to recommend a colleague who is.

Business associates. These are people you come in contactwith during the normal course of your business day. They can bedivided into four subgroups:

1. Suppliers/vendors. The owners of companieswho supply your inventory and other needs have a vital interest inyour company’s success and make excellent angels. A supplier’sinvestment may not come in the form of cash but in the form ofbetter payment terms or cheaper prices. Suppliers might even usetheir credit to help you get a loan.
2. Customers. These are especially goodcontacts if they use your product or service to make or sell theirown goods. List all the customers with whom you have this sort ofbusiness relationship.
3. Employees. Some of your key employees mightbe sitting on unused equity in their homes that would makeexcellent collateral for a business loan to your business. There’sno greater incentive to an employee than to share ownership in thecompany for which he or she works.
4. Competitors. These include owners ofsimilar companies you don’t directly compete with. If a competitoris doing business in another part of the country and doesn’tinfringe on your territory, he or she may be an empathetic investorand 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 personallyor do business with.

Middle managers. Angels in middle management positionsstart investing in small businesses for two major reasons–eitherthey’re bored with their jobs and are looking for outsideinterests, or they’re nearing retirement or fear they’re beingphased out.

Entrepreneurs. These angels are (or have been) successfulin their own businesses and like investing in other entrepreneurialventures. Entrepreneurs who are familiar with your industry makeexcellent investors.

Approaching affiliated angels is simply a matter of calling tomake an appointment. To look for nonaffiliated angels, try theseproven methods:

Advertising. The business opportunity section of yourlocal newspaper or The Wall Street Journal is an excellent place toadvertise for investors. Classified advertising is inexpensive,simple, quick and effective.

Business brokers. Business brokers know hundreds ofpeople with money who are interested in buying businesses. Eventhough you don’t want to sell your business, you might be willingto sell part of it. Since many brokers aren’t open to the idea oftheir clients buying just part of a business, you might have to usesome persuasion to get the broker to give you contact names. You’llfind a list of local business brokers in the Yellow Pages under”Business Brokers.”

Telemarketing. This approach has been called “dialing fordollars.” First you get a list of wealthy individuals in your area.Then you begin calling them. Obviously, you have to be highlymotivated to try this approach, and a good list is your mostimportant tool. Look up mailing-list brokers in the Yellow Pages.If you don’t feel comfortable making cold calls yourself, you canalways hire someone to do it for you.

Networking. Attending local venture capital groupmeetings and other business associations to make contacts is atime-consuming approach but can be effective. Most newspaperscontain an events calendar that lists when and where these types ofmeetings take place.

Intermediaries. These are firms that find angels forentrepreneurial companies. They’re usually called “boutiqueinvestment bankers.” This means they are small firms that focusprimarily on small financing deals. These firms typically charge apercentage of the amount of money they raise for you. Ask yourlawyer or accountant for the name of a reputable firm in yourarea.

Angels tend to find most of their investment opportunitiesthrough friends and business associates, so whatever method you useto search for angels, it’s also important to spread the word. Tellyour professional advisors and people you meet at networkingevents, or anyone who could be a good source of referrals, thatyou’re looking for investment capital. You never know what kind ofpeople they know.