4. Learn how angel groups work
5. Discover the differences between angel investors and venture capitalists
Time-Saving Tools
You’ll complete this Step more quickly if you have any of the following handy:
1. Your business plan
2. Your financial statements
3. An idea of how much money you need from an investor
Step 1:
What an Angel Investor Will Do for You
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Wanted: Entrepreneurs
If you’re wondering whether there’s an angel investor for your business, it’s helpful to know there’s a booming market in private investing. More than $23 billion was invested by U.S. angels in approximately 49,500 start-up businesses in 2005 according to the Center for Venture Research. On average, an individual angel invests $25,000 to $100,000 in a promising company.
You have a great business idea. Perhaps you’ve invented a process that will revolutionize the dry cleaning industry, you’ve created a device that pet owners will find indispensable, or you’ve developed a software program that reduces home energy consumption. You’ve already written a business plan, researched the market, and assembled at least the beginning of a team. You may have designed a prototype or developed the product or service. You may even have reached the stage of attracting your first paying customers.
Your business is on the launch pad, ready for the countdown. All you need now is money to help your company take off and grow.
That’s where an angel investor comes in. Angel investors are private individuals with money who are actively looking for opportunities to invest in promising young businesses like yours—companies founded on sound business ideas, which are likely to show significant, sustainable growth over the next three to seven years.
The best angel investors not only have money; they also have business and technical expertise, and contacts, and they will provide you with ongoing support. Find the right angel investor and you will not only receive the funds you need, you’ll gain a valuable business partner.
1. What an angel brings to the table
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Dumb Money vs. Smart Money
The investment community makes a distinction between “dumb” and “smart” money. Dumb money comes from someone who writes you a check but doesn’t understand your industry or care to be involved in its strategic aspects. Smart money comes from people who take an active interest in the success of your business by providing support, including industry knowledge and contacts.
While an immediate infusion of cash can be tempting, starting a successful company takes tremendous effort and expertise. Go for the smart money. Being able to leverage an investor’s expertise could mean the difference between success and failure.
Angel investors are just that: investors, not lenders. They provide interest-free money to entrepreneurs who are launching, expanding, or acquiring a business, in return for part of the ownership of that company.
Because angels are investors, not lenders, if a company fails, the entrepreneur does not need to repay the money. Since most new businesses are somewhat risky, not having to pay back the money if things don’t work out is a very appealing concept for an entrepreneur. But angels know that new businesses are risky too, so before they invest, they’ll want to know exactly how you plan to use their money in order to make your company grow. You’ll need to show them a strong business plan, realistic financials, and a capable team. And after they invest, angels expect regular reports on the company’s progress, as well as the chance to give their own input into how the business is run.
If a company succeeds, the angel investor gets a piece of its profits, a portion of the sale price of the company, and/or shares in the company if it should eventually go public on a stock exchange. As part owner of the company, the angel investor also acquires certain legal rights.
Typically, angels invest from $25,000 to $2,000,000 of their own money. But the best angel investors supply much more than cash. They also offer:
Business knowledge. Angels often have many years’ experience running and investing in companies. As the founder of a new company, you’ll benefit from their business acumen. Use their expertise to fill in your knowledge base or the skill set of your management team.
Industry expertise. In many cases, you’re likely to find an angel in the same industry as your new business. They’ll almost certainly have many years of experience, contacts, and a sound working understanding of how things really work in that industry.
Contacts. Not only do angel investors provide advice, they also provide introductions. Their network will become your network. They can lead you to potential customers, suppliers, lenders, and key employees.
Support. Angels are on your side. They want your business to succeed. And it’s not just because they stand to gain financially from your success—angels take pleasure in seeing entrepreneurs and businesses flourish. Whether they are semi-retired, invest occasionally, or invest as a full-time profession, a good angel will make the time to support you and your business with technical knowledge, practical experience, and business advice.
Follow-on financing. Angel investors can support your future fundraising efforts either by investing more of their own money or by helping you find additional angels or other sources of capital.
2. Why angels invest
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Bragging Rights
Some businesses are particularly “sexy” to investors. Angels who get involved in interesting companies—a restaurant, a winery, a minor-league sports team—will have a built-in conversation topic at cocktail parties and dinners with friends and business associates. They’ll also have their eye on the perks—the best table in “their” restaurant, the owners’ box at the game, or their name on the label of a good Pinot Noir!
The primary reason angel investors invest in entrepreneurial businesses is to make money. They will evaluate any business proposal first and foremost on financial criteria. Generally, they must feel confident that they will see a higher rate of return on their money by investing in your company than by investing in less risky alternatives, such as stocks and bonds. But other factors motivate angel investors as well, including:
The thrill of entrepreneurship. Many angels are former entrepreneurs, and they enjoy participating in the launch of a successful company, the competitive nature of business, and the challenge of the marketplace.
A desire to support their community. Angels want to contribute to the growth of the local economy. They recognize that new businesses—their investments—have a positive impact on the community by creating new jobs and revitalizing industries.
The search for a balanced investment portfolio. Angels are high-net-worth individuals and generally have other investments, such as real estate, stocks, and bonds. They may be motivated