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Angel Investment: 4 Steps to Success
Published on May 3, 2012
Read our article, 'Angel Investment: 4 Steps to Success' at 'Time to Start Up,' the small business blog by BizFilings.
In stories, angels often appear just when they’re most needed. When it comes to the real world of business, an angel is not likely to swoop in with bags of money to finance your dream venture. Rather, you’ll probably need to pursue an angel or angels – that is, a wealthy individual or a group of private investors – by mapping out a careful strategy and executing it successfully.
Step 1: Determine if you need an angel, and can land one
Angel investors provide money to early-stage enterprises; however, because they are looking to make a profit on their investment, angels are not likely to sink capital into a business that only exists on the back of a napkin and has no other funding secured. Instead, angels generally invest in companies that have gotten off the ground but are not in a position to pursue venture capital or large-scale debt financing, or raise funds through other channels. So before pursuing angel investors, you should tap family and friends and other sources of seed money.
Unlike venture capital firms, which typically invest more than $1 million in a given company, angels usually provide more modest sums. But like VCs, angels are looking to make a significant return on their investment, and so are most interested in companies with the potential to expand rapidly and bring in big profits. A Center for Venture Research report showed the leading industries for angel investment in the first quarter of 2011 were:
Healthcare (25 percent)
Industrial/energy (17 percent)
Biotech (14 percent)
Software (11 percent)
Media (8 percent)
Although these were the industries that angels have focused on recently, any business that is poised to expand can potentially secure angel financing.
If your business is at a stage where angel investment makes sense, you can begin the search for financing.
Step 2: Research and reach out to potential angels
Prayer is not necessary to reach angels in the business world, but it is necessary to delve into your Rolodex - or your social media contacts, professional association acquaintances, mentors and other people in your network. The majority of angels are high net-worth individuals who may not publicly solicit candidates for investment, so the only way to discover who they are is by leveraging your connections. Other entrepreneurs who have secured angel financing, lawyers who work in the equity investment field and business counselors are three excellent connections to tap.
Finding potential angels is only half the battle, though. Because angels will typically receive an ownership stake in your company as a condition of investment, you need to not only find potential angels, but those who will work well with your business. This can be a challenge, but it is also an opportunity. Many angels are successful entrepreneurs themselves, and so can be invaluable advisers with insight into your industry and target markets.
In addition to individual investors, there are a growing number of angel investment groups, similar to venture capital firms. The Angel Resource Institute links to many of these groups. Keep in mind that most angels invest close to home, so it's best to investigate angel groups near your center of operations. According to the Angel Capital Education Foundation, more than a quarter of angels in 2008 invested in a business within a two-hour drive.
Step 3: Apply for funding
Having identified a likely investor, it's time to make the case for why your company is a good investment opportunity.
For angel investment groups, the process sometimes begins by filling out an actual application for funding, often available on the group's website. This is typically prescreened to determine whether your company fits the basic criteria the group is looking for. About 10 to 25 percent of applicants pass prescreening to make it to further review, according to the Angel Resource Institute. If you move beyond the prescreening stage, you may be asked for a more detailed business plan or other information, so it's wise to be prepared with materials. A presentation to the group might follow, and if a group is still interested in funding your enterprise, they will conduct due diligence on your company before presenting a term sheet detailing how much they are willing to invest and on what conditions.
The process of wooing an individual investor may be less standardized, but will likely involve the same basic steps as persuading an angel group to fund your company. In addition to a strong product and business plan, angels will want to see a viable exit strategy showing how they will eventually profit from their investment. According to the CVR, mergers and acquisitions represented two-thirds of all angel exits in 2010, and annual returns at the time of exit for M&As and initial public offerings were between 24 and 36 percent.
It's important to keep in mind that angels are looking for a great product, but they are ultimately betting on the prowess of you and your management team. Therefore, building a strong team is just as important as innovating a must-have product.
Step 4: Continue to cultivate your angel relationships
Angels will typically assume an ownership stake in your company, so these are not structured to be take-the-money-and-run deals; however, it's shrewd to prioritize your relationship with angel investors and make an effort to keep it on a solid footing by communicating clearly and often, and reaching out for assistance as necessary.
The ACEF said communication among angel groups is on the rise and angel groups are increasingly growing their relationships with venture capital firms. So after investing their own dollars to help you grow, angels are likely to be key contacts within your organization helping you successfully negotiate the next phase of equity financing.