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Guide to Angel Investors

Angels are critical to helping entrepreneurs start and grow companies
By Daniel Kehrer

Angel investors are typically high net worth individuals and "cashed out" entrepreneurs who are interested in mentoring other entrepreneurs and sometimes get actively engaged in the businesses they back. Angels pump an estimated $25 billion into tens of thousands of startups annually. In the past, angels have typically operated solo. But in a new trend, angels are forming groups to pool resources and expertise, generate deal flow and create a formal screening process to pinpoint promising prospects. Here are three "must know" tips about finding and approaching angels, from the non-profit Angel Capital Education Foundation:

Angels are not venture capitalists (VC). Angels invest their own personal funds in a business. VC money usually comes from institutional sources. Angels also back startup and early-stage businesses, while venture capitalists prefer later stage companies. Individual angels invest $5,000 to $100,000, while VC investments go $2 million and up.
To attract angel interest, be willing to give up some ownership or control of your business, and be able to show a significant return within 3-7 years, as well as a profitable exit strategy.
Seek angel funding when: a) your product is fully developed; b) you've already invested your own money and exhausted other alternatives (like family and friends); c) you have existing or confirmed potential customers; d) you can demonstrate that the business is likely to grow fast and can pass $10 million in revenues within 3-5 years.

Action Steps

The best contacts and resources to help you get it done

Locate and line up potential angels and angel investor groups The non-profit Angel Capital Education Foundation (ACEF) provides educational programs and research for angel investors and helps entrepreneurs as well.

I recommend: Of vital interest is ACEF's directory of angel groups, available free at the ACEF Web site. This is by far the best and most comprehensive listing of angel groups, investors and related resources available anywhere. Check listings by region: California, Canada, Mid-Atlantic, Midwest, USA National, New England, New York, Northwest, Southeast, Southwest and West.

Enroll your business in the Active Capital Database Active Capital is a non-profit that provides the pre-eminent site for entrepreneurs seeking capital, and private investors seeking deals in a secure and protected enclave consistent with investment laws and regulations.

I recommend: Active Capital grew out of ACE-Net, an angel-matching service that was once apart of the U.S. Small Business Administration. Find out if you qualify to be listed in the database, how much money you should seek, where to enroll and how to prepare and submit your company information. This site is authoritative and offers other resources for entrepreneurs seeking funding.

For small sum, tech startup backing, check out Y Combinator This unique seed funding group splits its time between Cambridge MA (summers) and Silicon Valley (winters).

I recommend: Get to the Y Combinator site and read up. There's nothing fancy, but if you have a startup idea in the software or web services area and need between $5,000 and about $20,000, step up and submit your idea. These savvy startup funding folks are more interested in good ideas than slick business plans.

Discover details of angel deals AngelDeals.com is a virtual global network for Entrepreneurs seeking funding and private investors (angels) seeking opportunities.

I recommend: The AngelDeals site has a section for entrepreneurs that lists a variety of other helpful resources. Other sites with similar services and information include The Swap, Capital Connection, Funding Universe, Gathering of Angels, U.S. Angel Investors and FundingPost.

Crack the angel code with these other sources and solutions Angel Capital Education Foundation lists these other excellent resources, some national and others regional.

I recommend: Listings are free and easily accessible at ACEF.

Tips & Tactics

Helpful advice for making the most of this Guide

Angel groups come in many forms, but generally share these traits: Members help screen firms and commit to a certain amount of investments yearly. Groups meet regularly (often monthly) to hear investor presentations. Member angels decide individually whether to invest in a business or not.
Members work jointly to validate plans, statements and entrepreneur backgrounds.
While angel group sizes vary widely, the median pooled investment per round is around $400,000.
Some groups focus on specific areas, such as technology, but most are open to a variety of industry sectors, including software, medical devices, services and manufacturing.
Angel groups typically look for a management team with proven skills and experience; a unique product or service with a competitive edge, large market and a clear, workable plan; evidence that you've invested substantially yourself; potential for a strong return.
Once you locate a group, expect a multi-step process that includes an initial application, a 'first cut' quick pre-screening to decide if you meet minimum requirements, a full screen that includes one of the member's becoming your champion; a pitch meeting where you present to the entire group; and extensive due diligence.

Guide to Angel Investors

Action Steps

Tips & Tactics

How-To Guide from WORK.COM

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