Need money to finance your new venture or to fuel expansion? New companies struggle to qualify for extensive lender financing, especially if they have limited or poor credit and financial histories.
That’s why many business owners turn to angel investors to raise the capital they need to grow revenues and improve margins for a more robust bottom line.
An angel investor is an individual, or group of individuals, who provides capital for an existing or new venture, typically in exchange for an ownership (equity) stake.
Angel investors differ from venture capitalists (VC) in one key area: VCs are usually firms that pool the resources of other investors and use those funds to invest in businesses in return for an ownership stake.
An angel investor is usually an individual, or a group of individuals, who put their own money at risk by investing or lending to your company.
Why do business owners turn to angel investors? Angel investors are looking for sound investment opportunities. And angels realize that great companies grow, even in difficult times.
For example, auto giant, General Motors, made a massive investment in its first assembly line after the financial panic of 1907. Major companies like United Technologies, Revlon and Hyatt were founded during economic downturns. The Empire State Building was built during the Great Depression of the 1930s, one of the few major building projects undertaken in New York City during that decade.
The point? While you may need angel investors, they also need you. Angels are looking for solid investment opportunities and innovative business ideas. But is an angel right for your business? Perhaps.
You must be willing to cede some control and accept outside ownership in your company - the one you started in your garage. You’re also required to create an exit strategy, so angel investors receive a return on their investment, either through a buyout or when your company goes public through the creation of an initial public offering (IPO).
If you plan to develop a new product line, expand your business, build or purchase a new facility or kick off an extensive, new marketing campaign, funds received from angels make plans a reality.
Finding Angel Investors
Because many angel investors are individuals, or informal groups of investors, finding an angel isn’t as easy as paging through the phone book. Here are a few places to look for angel investor capital:
- Colleges and universities. Call university business or entrepreneurship program directors for leads. Many angel investors maintain ties with colleges because new business ventures are often created in conjunction with university research.
- Business incubators. While business incubators are primarily designed to offer shared services to fledgling businesses, many incubators also have access to angel investors.
- Investment clubs. While not formally structured as VC firms, many individuals have created investment clubs to extend their reach and to pool intelligence and resources.
Clubs tend not to advertise, so talk to the commercial loan officer at your bank, the local Chamber of Commerce, service organizations like the Lions Club or the Jaycees and other business organizations. That’s where you’ll discover leads for qualified angels.
- Also contact:
- small business development centers
- local accounting firms
- local attorneys
- municipal and state business development offices
- local newspaper business editors and reporters
- trade associations
- your company’s banker, lenders, investors and partners.
Angel investors aren’t always easy to find so start networking now!
What Do Angels Want?
Angel investors, like most investors, are choosy and they know the basics of smart investing. When angels scrutinize an opportunity, they look at the basics:
- An experienced management team with a proven track record of success. If you’re inexperienced, or just starting a new venture, you won’t have a proven history of success. You’ll have to demonstrate that you’re the right person to run the business. In this case, angels are investing in you, your ideas and your potential - a high risk investment, indeed.
- A solid product with competitive market advantages. Angel investors tend not to invest in service businesses because chances for growth to success are harder to project.
- A reasonable company valuation. Remember, an angel investor provides capital in return for ownership. Value your company too high and angels won’t take on the risk. Be prepared to explain your valuation to show investors they "get what they pay for."
Often, it’ll be necessary to hire a professional valuation firm to determine the true value of your business, but a professional, outsider’s opinion carries weight with angels. Valuations aren’t pie-in-the-sky numbers you simply created.
- A clear, thorough and well-defined investment offering. An offering is the agreement you reach with angels. Have your lawyer create a legally-defensible offer sheet detailing the terms of the agreement, as well as future provisions for later rounds of investment.
Most angel investors like product-based businesses - companies that make something angels can hold in their hands. This way, potential angels evaluate the product, the market and whether the product serves a growing demographic.
To determine if the investment is worth the risk, angels want to see a company that:
- could increase in value by a factor of at least 10 in the next three to five years. Angel investors understand not every deal pays off. They look for a few home runs to offset the strikeouts that inevitably occur.
- needs a significant infusion of capital. Small investments yield small returns. Provide a detailed plan that clearly and simply justifies why you’re seeking angels and how angel investment dollars will be used.
- is likely to attract other investors so risk is spread among additional parties.
- has developed an exit strategy that demonstrates how and when angels see returns on their cash. Most angels don’t want to own a piece of your company for ten or more years. They want to invest, see your business grow and cash out - usually in three years, on average.
Angels don’t employ the more conservative "buy and hold" investment strategy. Rather, they prefer a quick turnaround – in, out, cash the check.
One final benefit worth consideration: an angel isn’t just a source of capital. Most are experienced business people who bring knowledge, authority and networking opportunities to your desk.
Be choosey to find the right investor. It never hurts to have an angel sitting on your shoulder from 9-to-5.