Angel investors can be very difficult to identify and contact. They do not want to be deluged with business plans. The most common advice for finding one is to start with your professional advisors: attorney, accountant and banker. They will undoubtedly know someone who might have an interest in investing in a business -- and they can provide the professional reference needed to get your business plan in the door.
Another tactic is to conduct what is called "deep" networking -- start with people you know, have them suggest people, contact those people asking for more suggestions of possible angels or people who might know of angels, repeating this process until the right person is identified. This can be a time-consuming process, but worth pursuing to find the right match for your business.
Other resources for finding an angel are directories, conventions, incubators, and electronic networks. There are a number of angel networking firms, some of them internet-based. These firms charge a subscription fee to each entrepreneur and investor to be included in the database. They normally prequalify both the investors and the entrepreneurs, and help with compiling appropriate agreements.
Professional placement agents are available, but they can be expensive. If that is the route you choose, be certain to check their track record -- how many deals have they worked on vs. how many have been funded, and how many recent deals have they made. Also, ask for references from people they have arranged funding for, and call the references. Ask how long it took to get the money, how the angels they were introduced to behaved and how they reacted when a problem arose. While it is not always possible, it is preferable to pay the placement agent after you actually get the capital. Going rates are anywhere from five to 10 percent.
A recent trend has been the creation of formal networks of angels. The reason behind many of these affiliations is that angels may only want to invest $50,000 - $100,000 in any one firm while many companies need $200,000 to $1 million. It allows a pooling of money and expertise. Many are breakfast clubs that meet once a month to look at candidates that members of the network have invested in or are willing to invest their own money in. To be considered by one of these networks, you usually need to be sponsored by one of their members. And how do you meet that member -- by deep networking, of course.
What to Look For In an Angel
The importance of chemistry between an entrepreneur and an investor cannot be underestimated. This is a relationship that will help forge future directions for the business. You and your angel must work well together.
Angel investors have differing agendas that they bring to their investments. Your angel's agenda and your needs should complement each other. Think through what you are looking for, and before accepting any money, assure yourself that you are dealing with someone who has an agenda that fits with what you think is right for your business.
There are a wide variety of individuals who choose to become angel investors. According to Rich Bendis, an angel investor and president of Kansas Technology Enterprise Corp. in Topeka, Kansas, some of the types that you might encounter are:
Corporate angels -- former executives who have been outplaced or have taken early retirement. While investment is a goal, many, in fact, are looking for a job. Usually some type of position is part of the deal. One of their drawbacks can be that in startups you need to wear many hats, whereas former executives may have risen to a level of specialization that doesn't fit in a startup operation. Still, if they are not too controlling, their expertise and contacts can provide valuable input to the business.
Entrepreneurial angels -- entrepreneurs who already own and operate highly successful businesses. With an ongoing source of income and perhaps cash in their pocket from an IPO, they can take bigger risks and invest more capital. Usually entrepreneurial angels are looking for synergy with their current business -- a way to diversify their portfolios -- or they want to help other entrepreneurs up the same ladder. The downside can be that if for some reason the synergy or potential does not happen as quickly as envisioned, they can move on to other projects on short notice. However, they can be less demanding and more hands off, giving the entrepreneur an opportunity to grow in their own direction with substantial financial backing. Most angel funding today comes from entrepreneurial angels.
Enthusiast angels -- retirees who enjoy simply being involved in deals. Most are over 65, independently wealthy from a business they started, and have abbreviated work schedules. Investing is a hobby. They often diversity their investments among several companies so the size of their investment tends to be small -- $10,000 - $200,000. Usually they want no role in management. In a sense, enthusiasts are the traditional angel -- someone with deep pockets who is willing to take a passive role. Unfortunately, they are also few and far between.
Micromanagement angels -- serious investors who have, in most cases, made their wealth through their own efforts. They believe they know how a business should be run. While rarely a participant in management, they tend to be very active on the board and are not afraid to bring in new management if things do not do well. Control can be important to these type of angels.
Professional angels -- doctors, lawyers, and accountants who like to invest in companies that offer a product or service with which they have some experience. These investors typically don't care if they know what is going on in the business on a daily basis, but they can be impatient when the going gets tough and may think the company is in trouble before it actually is because of their inexperience in business themselves. Some professionals want to be hired by the business as a consultant in their area of expertise.
When identifying potential angels for your business, some questions which you need to ask before signing an agreement are:
What background, expertise, connections, experience, and credibility do they have in the same market as your product or service?
What kind of value can they add in addition to their financial support?
How involved do the investors want to be? Be clear about what your company needs and doesn't need, how and when the angel will help with such tasks as negotiating bank loans, checking out candidates for acquisition and recruiting senior managers.
How do they feel about dilution of interest? For example, if the company needs more money and it raises money from other sources, it waters down the original investors investment. It might be reasonable to give the angels an option to put in more money to avoid this dilution.
What is their time frame for exit (i.e., when do they expect to see a return on their money)?
Do they want to be bought out for an appraised value?
What is their ability to help get more financing when it is needed?
What are their expectations financially?
What are their goals? Are they in consonance with the goals of your business?
The right angel investor can help your business move rapidly to the next level. The wrong angel investor can mean an end to your dream. While money may seem critical at this juncture in your business, take this step carefully. Look at several candidates, ask lots of questions, get outside advice -- you won't regret it.