CHARTING YOUR FUTURE
Your bank has said "no" to your loan application... your startup business is not quite ready to approach venture capitalists ... and yet you need more funding to get your business venture on firmer ground. Maybe it's time to make contact with an angel. That is, an angel investor. Angel investors are defined as wealthy individuals who invest in start-up and early stage businesses. Of interest to readers of this column is that based on my initial research, it appears minority business owners rarely use angel investors.
While often confused with venture capitalists, angel investors really play a different role. Angels are typically business owners or former business owners who have cashed out and are now interested in investing their own money and expertise. They typically invest less (often significantly less) than $500,000 in a given company. Usually, they limit their investments to companies in industries they have good knowledge of and where they can supplement their cash investment with sage advice.
Venture capitalists, by contrast, invest pooled funds they have raised from institutions and individuals. As a result, they have much larger sums available and typically make individual investments of $1 million or more. Venture capital also tends to be more expensive. A venture capitalist will usually demand a larger percentage of a company's equity for a given amount of investment.
With the exception of the Internet investment frenzy a few years ago, venture capitalists limit their investments to companies that have already received several rounds of financing and are more mid-stage.
Angel investors and venture capitalists do share some common characteristics, however. They both look for high-growth opportunities where they can earn a high return, and where there is a clearly defined exit strategy. Because both groups are looking for high growth, the largest shares of their portfolios tend to be in high-technology investments, although there are a significant number of angels who invest in other industries in which they have a strong background.
Catching An Angel's Eye
In assessing an investment opportunity, angel investors look for several things:
A match with their area of expertise.
Most angels want to invest in businesses they understand. And don't expect them to be silent partners. They want to use their experience and expertise to provide guidance, which can be a win-win for the business owner.
A solid management team.
This is more important to the investor than the strategy or business plan. Since a start-up or early stage company has little or no track record, the strength and experience of the company's personnel is its most valuable, tangible asset.
A viable business plan.
The last comment not withstanding, the angel still wants to see that a viable plan (with a change to achieve the angel's investment objectives) has been developed. Critical to the plan is an exit strategy -- an eventual IPO, sale of the company, or other way that the angel can cash out. Angels expect to be able to reap their reward within 5 to 7 years.
The best strategy for finding angel investors is to network with those who have regular contact with them. Your CPA, attorney, banker, other professional advisors, and even suppliers and customers can all be good referral sources. In many communities, there are networks of angels who regularly meet to review pitches from companies looking for funding.
Ironically, the volatile economy has had only a modest effect on the availability of angel financing. Many angels are taking advantage of more realistic valuations and the retreat of venture capitalists from the angel's traditional market niche.
So, if your business needs a financial shot in the arm, try an angel. You may find what they have to offer simply heavenly.
Need another alternative financing option? Log in next week for the first of my three part series on intelligently using the services of the Small Business Administration.