Dear Dan: My partners and I have a killer business concept and a polished business plan, but we've struck out trying to raise money from friends and family. How do we look for angel investors? - Need an Angel
Dear Need: A recession can be a great time to start a business. The cost of everything from supplies to office space and professional expertise is down, and new market opportunities open up. But finding startup capital can be another matter.
Angel investors have become a key force supplying startup and early stage capital to promising young companies. In 2007, the Center for Venture Research estimates that angels invested $26 billion in about 58,000 businesses. But that figure dipped about 10 percent in 2008, and will likely drop more in 2009. Still, angel investors are actively looking for promising ventures to back.
Once conducted largely behind the scenes, the angel investment process has lately moved more into the open. Angel investors are wealthy individuals who invest money as well as their own time and expertise in new businesses. Some angels act solo, but today's angels are more likely to work through angel investor groups that have proliferated nationwide.
Keep in mind that angel investors and venture capital (VC) firms are different. Angels invest mostly in startup and early stage businesses. Venture capitalists provide growth capital for businesses further along. While VC and angels invest roughly the same amounts ($20-$30 billion annually), angels parse that out to over 50,000 businesses, while VC investors back less than 4,000 companies. And angels invest their own money, while venture capitalists frequently invest money put up by others.
In the current economy, many angels have seen the value of their personal assets plunge, putting a crimp in their ability to make new investments. Many have their hands full mentoring the companies they've already put money in.
The good news for capital-seeking entrepreneurs is this: Locating angel groups, learning how they work, what types of startups they are interested in, and finding out the exact process for how they can be approach, has become easier thanks to two allied organizations: the Angel Capital Association (ACE) and the Angel Capital Education Foundation (ACEF).
ACE is North America's professional alliance of angel groups, bringing together nearly 350 angel organizations. ACEF is a non-profit founded by the Kauffman Foundation, a premier organization that supports entrepreneurship.
What You Can do Right Now
Start at AngelCapitalEducation.org, the ACEF website. ACEF does not make investments, but rather provides information and links to support the process. Go to the "For Entrepreneurs" section under the "Resources" tab. Here you'll find out:
- If your type of business is right for an angel group investment;
- When to approach an angel group;
- What criteria angel groups use to select entrepreneurs to back;
- What process you can expect to apply for group funding; and
- Whether you should expect to pay fees to participate.
The investment process has numerous steps, including an initial application, pre-screening, screening, investment meeting, due diligence and, finally, a term sheet offering if you make it all the way through. About one in three angel groups charges a fee to present your idea. For those groups that do charge, the average application fee is about $150, and the average presentation fee is $500.
Look for Angel Groups in Your Area
Once you're comfortable with how the process works, you can seek out angel groups to approach. The best place to launch your search is the ACE website at AngelCapitalAssociation.org. Go to the "Directory" section which lists most members of the organization.
Groups are organized by state, region or country, such as California, New England or Canada. The directory includes a link to each member's website where you can learn more about that particular group, including investment preferences and application process.
The directory includes hundreds of individual angel groups. Grand Angels, for example, based in Grand Rapids, Michigan, says it typically invests between $250,000 and $1 million in early-stage companies located in Western Michigan. But the website also notes a shift in early 2009 to include an interest in established companies seeking to grow.
To expand your startup savvy, also check out these sites:
StartupNation.com offers a soup-to-nuts array of great startup information, including angel investor insights, developing an elevator pitch, and much more.
IdeaBlob.com is an innovative site that runs ongoing competitions that let you submit business ideas with a chance to win $10,000.