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BY KATHY ELLIOTT
 ntrepreneurs
are the lifeblood of our economy. They pioneer new
technologies, develop exciting new products, and
form businesses that create jobs and revenues. They
also contribute to our tax base and help build a
sustainable economic infrastructure. So, how do
these entrepreneurs find their own lifeblood -
the capital to start, grow and build a company?
Ask any entrepreneur out there looking for cash
today, and you'll hear the same answer -
"It isn't easy!" You may just not hear it expressed
in such a polite way.
Where
can an entrepreneur go after she has depleted personal
savings, maxed-out credit cards, and been turned
down by banks, assuming she doesn't have a family
tree sprinkled with rich relatives?
One
answer may be angel investors, wealthy individuals
who chose to invest a portion of their personal
assets in early stage companies.
What
Is an Angel Investor?
Most often, angel investors are successful entrepreneurs
who have been through, and understand, the process
of growing and funding a company. Angels invest
in start-ups for the economic return, and since
this type of investment carries above-average risk,
they expect above-average returns.
Many
angels also enjoy investing in this sector because
they can contribute their expertise and contacts
to the entrepreneur and help play a role in making
the company, and hence their investment, a successful
one.
The
term "angel investor" was originally coined to describe
individuals who were patrons of the arts and backed
Broadway shows with their own capital, supporting
the arts and the careers of fledgling actors, but
typically losing their entire "investment" in the
process.
The
term "angel investor" is still widely used but,
because of this history, many of today's angels
prefer to be called "private investors" instead,
removing any insinuation that they are investing
for reasons other than economic.
How
Do Angel Deals Work?
Angels
are a major factor in the funding of early stage
enterprises, and they play an important role in
funding companies that may be too small or too early
for venture capital investing.
Estimates
compiled by Jeffrey Sohl, director of the Center
for Venture Research at the University of New Hampshire,
indicate that there are 250,000 angels in the United
States. During 2002, angel investors committed a
total of $20 billion to some 20,000 U.S. ventures.
Although this is a large figure, it actually represents
a decrease from the $30 billion invested by 400,000
angels during the peak year of 2000, reflecting
the harsh downturn in investment markets and subsequent
lack of liquidity. However, with the recent improvement
in the economy and stock market, some of these dormant
angels are now re-emerging.
Angel
investors align around common interests and industry
expertise - software or healthcare, for
example. Typically, each angel will invest $25,000
to $100,000 (although some will go higher) in a
company, and many investments are pooled among five
or six angels. That means that the average angel
deal will range anywhere from $125,000 to $600,000.
It is not unheard of for companies to have raised
more than $2 million from angels, and there are
angel networks that aggregate investments from dozens
of angels.
When
and Where Should You Seek an Angel?
Consider angels only after you have put your
own capital to work, "bootstrapped" to product development,
and demonstrated market need, most often required
in this environment in the form of customers and
revenue. The days of an angel, or any investor,
helping to fund an idea sketched out on a cocktail
napkin are over.
As
mentioned earlier, angels invest to receive an above-average
return that typically is realized through an "exit"
- the sale or merger of your company that
enables investors to cash out. That means you must
want, and be able to demonstrate, a clear exit strategy.
Among other attributes that are considered a positive
by angel investors:
- your
company participates in a large and growing market;
- your
company has strong revenue growth leading to substantial
revenues over a five-year time frame; and
- your
company has a sustainable competitive advantage
and high barriers to entry.
Of
course, underscoring all of the above factors is
your experience in your market and your reputation.
Not
all companies have the requisite attributes to attract
private investors. Companies that receive angel
investment are a small minority - the exception,
rather than the rule. Since it is time-consuming
to find and cultivate angel investors, make sure
your company has the qualities that angels find
attractive before you undertake this process.
Where
can you find such dream investors? It's not easy,
but they can be unearthed through extensive networking
in the right venues - investment conferences,
industry and trade association meetings, and the
like.
Direct
personal introductions are the preferred route.
Your attorney, banker, accountant, and other service
providers are good sources for introductions. Among
the best referral networks are other entrepreneurs
you know.
A
Few Last Words
Remember, angels invest in order to grow a company.
Do not expect that angels will invest to help you
satisfy accumulated debts or make good on accrued
salaries for you and others.
However,
their capital may be allocated to pay you an ongoing
salary in the future and to hire key people, and
in some cases, a deal can be structured to convert
accrued salaries into shares of your company.
Make
sure that you have a good attorney experienced in
early stage company issues. This will become especially
important for you when you begin to review deal
terms and negotiate an appropriate deal structure.
One
more caveat: While angels are performing due diligence
on you, make sure you, in turn, perform due diligence
on them. Check the references of your potential
investor(s) to understand how they have worked with
companies in the past. Trust your instincts. If
you begin to sense bad chemistry or divergences
in strategy, no matter how intense your need for
capital, don't be afraid to turn an investor away.
So,
if you need capital and meet the criteria for an
angel deal, take heart.
There
are a growing number of formal angel investor groups,
and they are becoming easier to find. Many have
Web sites that list their investment criteria and
contact information. Also, since early stage investors
make these types of investments for an "exit" in
order to turn an illiquid investment into a liquid
one, the recent pick-up in merger and acquisition
activity is a good sign for all those who seek their
own angel. Don't be afraid to look for yours.
KATHY
ELLIOTT is an active angel investor and co-author
of The Old Girls' Network: Insider Advice for Women
Building Businesses in a Man's World (Perseus Publishing,
August 2003). She can be contacted at kme@mindspring.com.
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