If you’re an entrepreneur with a great idea but you’ve exhausted all your personal resources for startup funding―as well as your friends and family―it might be time to look for an angel investor. Angel investors are wealthy individuals who are willing to invest anywhere from a couple of hundred thousand dollars to as much as $5 million or more in an early-stage business opportunity or startup. They’re a viable option for many, but only under the right circumstances.
When it comes to knowing whether or not angel investing is a possibility and where to find one, the most important rules of the game are fairly straight forward. Here they are:
• Rule #1: Don’t kid yourself. If you believe your new business concept or product is the stuff truly successful companies are made of then you have to not only convey that passion, you’ve got to be able to sell it. And selling it means your facts, figures and projections have to be air tight. Angel investors are in the business of making money, pure and simple. If what you’re selling and how well you’re selling it don’t add up to profits, you’re going to have a very hard time finding yourself an angel.
• Rule #2: Angel funding is generous yet finite. Angel investors don’t routinely deal in numbers over $1 million, although it has been known to happen on occasion. In fact, angel investments range from as little as a few thousand dollars to a few million, with the average being around the $300,000-plus mark. So before you make a pitch to find an angel, you better be sure you can get your business off the ground and/or where it needs to be for the kind of money you’re talking about.
• Rule #3: Relinquishing some control is part of the deal. Although any equity investor will want you to maintain your majority interest in your own company so that you will stay motivated to succeed, they’ll also expect an ownership piece in return. Angel investors in particular usually set the bar at anywhere from 10% to 35% or even more in some cases. But hey, even if you keep what might seem like "only 75%" of your own company it sure beats the alternative, which might be nothing without a backer, right?
• Rule #4: Angels put their interests where there is interest. You have to be very careful that any angel investor you approach with your idea actually has an interest in your particular industry. Some of them only want to invest in biotech, some in manufacturing and the list goes on. If you don’t do your homework to make sure a particular investor is open to what you’re selling, you’re wasting your time and theirs.
• Rule #5: Polish is paramount. If you want an angel investor to give you their hard-earned money, you’ve got to work for it. Expect extreme scrutiny. You must have a business plan that is not only well-written and well-conceived, but concise and very specific. Bottom line, you’ve got to have your act together on every level like you never may have before.
• Rule #6: Angels are everywhere. According to the Center for Venture Research at the University of New Hampshire, angel investing made a “significant comeback and (saw) stabilization in 2011.” In fact, the number of angel investors nationwide is now estimated to be well into the thousands, and they can be found hiding in plain sight virtually anywhere. Universities, business incubators, angel investor groups, chambers of commerce, small business development centers, banks, even your accountant, your attorney or the editor of your local business publication…all of these avenues are available to you in identifying a potential angel investor.
• Rule #7: An angel’s halo should be about more than just money. Angels are also mentors. They are much more often than not experienced and successful business people in their own right. They won’t just expect to own part of your company in return for their investment, they’ll also want to have a say. That’s why it is imperative that you choose an investor that is a good fit for you and your management style, someone who matches your interests and that you can and are willing to learn from.
According to a recent news release from Growthink, a leading provider of entrepreneurial consulting services, 2012 will be a good year to raise money from angel investors. Even though the following organizations don't do any angel investing themselves per se, they are great resources to get you started in and to help you facilitate your search:
Inc. Magazine’s “How to Find an Angel Investor” Guide
The Angel Capital Association