Angels (Personal Investors)

Table of Contents

1. What is an angel?

2. Who is this good for?

3. When is this the best choice for me?

4. When is this not advised?

5. Tips for getting the money.

6. Ingredients you'll need on hand.

7. Rhonda's Tips.

8. Watch out for!

1. What is an angel?

The most heavenly of financial bodies: an individual who invests in your company, usually in the very early stages. Some angels bring expertise as well as money to an investment. Angels' desire for control varies widely. In some areas, like California's Silicon Valley, there are "angels" who regularly invest in companies, and there are groups of angels in other areas and on a national level. Other angels can be found through financial advisors, lawyers, accountants. Some times the early round of financing a company is called "the doctor and lawyer round" since many angels are highly paid professionals looking for other investments for their money.

2. Who is this good for?

• Early-stage companies who are too new to qualify for bank loans: Angels typically provide seed money for companies just starting up or emerging from the prototype stage to establish their first operations;

• Expanding companies: Angels can also be good for established companies that are too small to attract professional venture capital but have the potential for substantial future growth;

• Companies needing only a small amount of money: Angels usually invest in the $10,000 to $100,000 range, although some may invest more or less. Very few angels invest more than a few hundred thousand dollars.

3. When is this the best choice for me?

• When you need a few thousand to a few hundred thousand dollars to get to get going, and you don't have the personal resources to make it happen;

• When you're in the early stage of a company and want to get to a level that will attract venture capital without giving away too much equity at this stage;

• When you have a large network of wealthy individuals;

• When you'd like to have an investor who can take a personal interest in the company as well as making a financial commitment.

4. When is this not advised?

• When you need a large sum of money, usually over $100,000 to a few hundred thousand dollars -- then you usually need institutional investors such as venture capital firms;

• When your company doesn't offer substantial opportunity for growth: angels want a large return on investment just like any other investor in a risky venture;

• When you don't have any exit strategy: angels want to know how they are going to get their money out some day.

5. Tips for getting the money

• Angels are matched with mortals through relentless networking among contacts, friends, professionals. Anticipate needing a lot of time to make a lot of telephone calls, attend a lot of meetings, and otherwise contact everyone you can think of to find potential investors. Financial advisors, lawyers, and accountants often know of high income individuals looking for investments.

• Don't be discouraged by refusals from angels, especially those based on a lack of interest in the concept rather than a sincere feeling that the company will not succeed. Angels often invest only in those businesses that interest them personally or with which they've had some experience. Ask angels who turn you down if they know of others who might be interested in the concept; try to turn a refusal into a referral.

• How did your angel make her money? If you can, dig up published reports on her current or past companies to divine details about her operating style and even the depth of her pockets.

• Discard stereotypes. Entrepreneurs rub shoulders with angels every day, according to James Arkebauer, author of Ultrapreneuring and president of Venture Associates Ltd., a Denver financial consulting firm to growth companies. "You have to look beyond the doctor, lawyer, dentist, accountant," he says. "Think about your neighbor who drives nice cars and owns a manufacturing company."

6. Ingredients you'll need on hand

• A concise summary of your concept and business plan.

• A longer dog-and-pony show, that includes a summary of your business plan to present to potential angels who are seriously interested.

• Basic financial package.

• Your rolodex to call friends, relatives, associates to see who they know that might be interested; a telephone book to identify financial advisors; lists of angel networks.

• Chutzpah.

7. Rhonda's Tips

Business Planning Expert Rhonda Abrams offers tips and insights into taking loans from personal sources.

Companies that offer what I call the "cocktail party factor" make the best candidates for angel investors. These are companies whose concept can be grasped easily by people not in the business, that have a certain degree of "sexiness" or excitement, and that angels can boast about to their friends at the country club.

There are two kinds of angel investors: professional investors and amateur investors. The professional angel is someone who regularly invests in new businesses, knows how to examine a potential investment, will ask tough questions and will bring a professional attitude to dealing with you and your company. These angels may be harder to get to invest but will probably be more sophisticated as an ongoing business partners.

"Amateur" angels are high income individuals who would just like to find a way to make more money than traditional investments like stocks and bonds. They can be very impulsive and easier to sell with a vision of great wealth. But they are likely to be more nervous and meddlesome ongoing partners, without the experience to weather the inevitable set-backs that come with all early-stage companies.

8. Watch out for!

• Early money is expensive money. Expect to get a low valuation of your company, having to give up a relatively large share for the money you receive, however this should be no more than 10-30% and, if possible, even lower.

• Angels who become devils after you've got their money. Scout down entrepreneurs whom the angel has already supported.Was he a dream or a nightmare to live with?

• Angels who expect to get rich quick. Early stage companies almost always take a long time before they are able to give excellent returns to investors and there are inevitable set-backs. Nothing is worse than having someone breathing down your neck wondering when they're going to see their first million.

• Angels who don't understand risk. They could lose all their money. They need to know that. Don't try to fool them into thinking otherwise.

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