For small promising startups that wish to access something more than the friends and family capital, the Angel Investor networks are probably the only place left to find capital. The VC industry, like everyone else over the last year, has gone through some introspection in how they deploy capital. Many traditional VC’s have moved away from start up and seed stage investing because of the perceived risks and, more importantly, the time frame in holding these investments to maturity. Right now syndication of larger, later stage deals is becoming common place where in years past that was not done.
Where does that leave promising start-up companies? Well, after the friends and family round there are Angel Investors who typically have a higher risk profile and like to get in earlier to these promising companies. There is a wealth of data on the web for entrepreneurs looking for Angel Capital. Typically, Angel groups like to invest in a company that is within a close geography to its members. Now that is not always the case but more a rule of thumb. In the larger areas, such as Southern California, there are a myriad of Angel groups. Some of the better known Angel groups are the Tech Coast Angels
, Private Capital Network and the Keiretsu Forum The Emperor’s New Groove move
all have large memberships and are fairly active. For more angel group information, read my post “Getting Your Wings”.
What will attract an Angel investor? Just like venture capitalists, Angels are looking for a company that has 3 key elements.
- The first is a large addressable market for the product or service and how the entrepreneur has positioned his company to definitively tap that respective market.
- Second is management experience of that industry or market. Does the entrepreneur have a specific background and deep knowledge of the industry?
- Last, does the company have patents, intellectual property, trademarks or any other significant asset or barrier to entry.
There are certainly many additional items but these three points are universal in all Angel investors’ minds and if an entrepreneur cannot get past these points then their chances of attaining funding drop dramatically. As the entrepreneur moves along the process there some very important items they must understand or better stated must not do. The single most important one is “use of proceeds” or how is the entrepreneur going to spend the money? The money must not predominantly go towards salary and should not go towards paying off the entrepreneur’s debt or older investor’s debt. Being involved in two Angel groups I cannot emphasize enough to the entrepreneurs how important it is to make sure the capital being asked for is going towards growth, marketing etc. Angels tend to focus on businesses that they have the ability to add value. An Angel who makes or made his or her money in software is probably not going to be interested in a consumer products company because there is no value add or leverage. Angels like to invest in companies where they believe that their contacts and experience can add as much, if not more, than just the capital. If an entrepreneur is going to present to an Angel group it is always recommended that they try and get an idea of what type of Angels they are presenting to. For instance if an entrepreneur is pitching a company that has the new hot energy drink to a room full of Angels that have mostly made their money in technology, well then the reception could be a cold one.
Angels tend to be predominantly male but there are certainly woman Angel groups out there such as women 2.0
although these women oriented groups tend to be less about the actual capital and more about the groups resources and support. According to The Center for Venture Research in 2008 16.5% of all Angel investors were woman and they accounted for 15.7% of companies funded by Angels.
One of the most helpful tips an entrepreneur can get is “always be prepared”. Sounds a bit cheesy at first but the crux of that statement is really about having all the information in place and readily accessible.
Angels are always heavy on due diligence so if the entrepreneur wants to streamline the process the best thing I encourage them to do is start an online data room and up load all documentation relating to the company and the entrepreneurs themselves. The more professionally the information is presented the better impression the angels will have.
For entrepreneurs it is not an easy process but having conviction coupled with knowledge and ability will certainly increase the chances of a successful outcome.
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