Angel Investors (or simply Angels) as defined by Wikipedia are affluent individuals who provide capital for business start-ups, usually in exchange for an equity stake. Unlike venture capitalists, angels typically do not pool money in a professionally-managed fund. However, angel investors often organize themselves in angel networks or angel groups to share research and pool investment capital.
Before we start flying around in the air with these angels, let’s talk a minute about capital phases. Capital phases are the stages that a business passes through ideally when looking to generate “Early-stage / Pre-revenue” capital. The first section is the concept phase, where typical needs are technical development, market research, feasibility analysis, and business planning. The sources of funding in this “Seed” stage are personal savings, grants, credit cards, and “family and friends”.
Before moving into the commercialization phase, we need to understand exactly what an angel investor provides. Angel capital fills the gap in start-up financing between the “three F” (friends, family and fools) and venture capital. Most venture capital funds will not consider investments under $1 million, while it is difficult to raise more than $100,000 – $200,000 from friends and family. Thus, angel investment is a common second round of financing for high-growth start-ups.
Commercialization begins with a developed business plan, and progresses into the next phase when revenue begins to flow in regularly. In the commercialization phase your goal is to get your product to the market. This means having an operation that is up and ready to run smoothly and that has the ability to produce its product or service while executing transactions as orders are received. The challenges that you face in this stage vary; your capital needs now will require outside capital to start, in addition you may still be in the pre-revenue phase which will make attracting capital even more difficult. Additional challenges may be no proof of market acceptance, banks won’t lend for this, SBA won’t lend for this, and venture capitalists are not interested either. This phase is what determines your market readiness. If you accomplish all your goals in this phase and reach a point where revenues are flowing in, you can begin to move into the final stage, the growth stage.
The growth stage is when your product or service has reached market acceptance. Once your product has been accepted by the market you begin to fall into a whole new realm of business operation and financing. By this point you may be self sufficient and an operation which no longer needs to look for outside capital. This is the goal and this would be great! However, this also may be where your operation begins to look for venture capital in the range of 25 million and up. We will cover this in another article, in the near future. Right now, let’s jump back to talking about the actual angel investor.
Angels are private investors with high net-worth that are accredited investors and are willing to make high-risk investments. They have had a successful business career; they are often retired business owners or executives who are looking for a “hobby”, not just monetary return. Thus, aside from funds, angel investors can sometimes provide valuable management advice and important contacts. However, angel investments bear extremely high risk, and thus require a very high return on investment. Typical angel investments require a return of at least 15-20 times the original investment within 5 years, as well as an exit strategy – plans for an IPO or an acquisition. Angel financing is thus one of the most expensive sources of funds. However, cheaper sources of capital, such as bank financing, are not available for most early-stage ventures.
Angels understand that the investor often gets burned, so they tend to favor markets they know. They usually market validation and co-investors in order to feel comfortable.
Deal breakers are fairly simple when meeting with investors. You want to make sure that you an up-beat positive attitude. A successful Angel investor would hesitate to invest in someone with a poor attitude or negative mood. You want to make sure that you are not too inflexible, or arrogant. You want to be strong and creative in your pitch, embrace the passion you have for your product or service. However, do not create a sense of inflexibility in case the investors may be interested but have a slightly different outlook. This is a good thing, this means they see potential and they would like to help make modifications to achieve a higher level of success. Another good point to remember is the topic of exaggeration; most seasoned investors can tell when inflated hype is being added to their investment salad. As soon as they smell the pepper (an inflated pitch), they will return the salad and never order it again, so be realistic in your predictions and assumptions. One of the last points that I think is very crucial, is to understand that the founders must have some risk at stake in the investment. If an angel thinks that the founders are trying to cover their own backsides (in case of failure), this will make them extremely reluctant to invest. So make sure you have a small but adequate stake in case of failure that is visible to those who are investing.
By now, you should have a good grasp on what an Angel can do for you and your company. There are resources available for contacting Angel investors on the web and at http://www.motivatedentrepreneur.com/investor-alley.shtml. You should always approach business incubation specialists who are familiar with Angel investors and can help prepare and guide you through the process of meeting, qualifying for and finding funding. These professional have relationships with Angel networks, and they are very knowledgeable in the steps that need to be taken in order to receive funding. If you never spread you wings and fly, you’ll never reach the sky!
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About the author:
Ryan HOback is Presidnet and Founder of The Motivated Entrepreneur, Business Incubation Specialists and COnsultants