A large and growing source of capital for entrepreneurs is individuals who invest their own money in businesses.
So-called angel investors spent more than $23 billion in the United States in 2005.
A few years back, the Kauffman Foundation of Kansas City, Mo., funded the Angel Capital Association, helping wealthy individuals establish angel groups in virtually every large and midsize city in the United States, and many smaller ones as well.
The Angel Capital Association led to the formation of the Angel Capital Education Foundation, and now it is far easier for angel groups to start up and for individual angels to understand the process.
More angels. More money. More opportunity for entrepreneurs.
Business owners who want to learn more about finding an angel and making a successful pitch can find step-by-step directions in “Finding an Angel Investor In A Day: Get it done right, get it done fast!” (The Planning Shop, $19.95).
The author, Joseph Bell, is a former angel investor and currently professor of entrepreneurship at the University of Arkansas, Little Rock.
Not all businesses are good candidates for angels. It’s critical to have a high-growth business. A business that may provide a nice income for an entrepreneur/owner may not be able to generate enough funds to provide hefty financial returns to an angel.
Some tips from “Finding an Angel Investor In A Day”:
• Angel investors are looking for businesses that grow big enough and fast enough to provide a high return on investment. The return an angel receives must be much higher than what they could get by putting their money into other, less risky investments, such as stocks, bonds, or real estate.
• To an investor, the higher the risk, the higher the reward must be. Some steps to lowering the perceived risk include securing key customers, having a working prototype and making sales.
• It is unlikely, and possibly unwise, to raise all the money you’ll need at one time. Instead, raise money in stages. You give up the most equity (percentage ownership of your company) per dollar the earlier you raise the funds. With each stage of development – perfecting the product, securing paying customers, developing a significant portion of market share – the risk for the investor is reduced and you’re in a better bargaining position.
• When you get an investor, you’ll negotiate the valuation of your company to determine what percentage of ownership they’ll receive. In other words, if someone invests $100,000 and receives 10 percent ownership, then the valuation of the company is $1,000,000. Entrepreneurs want their companies to be valued as high as possible so they give up the least amount of ownership. But an initial high valuation can set up problems for later rounds of financing, and sophisticated investors, especially venture capitalists, may steer clear of companies with unrealistically high valuations.
There’s never been a better time for entrepreneurs to seek angel financing. If you and your company are the right fit for a private investor, consider this growing source of capital. Just be sure to prepare yourself before you start the process so you can convince an angel that yours is a heavenly opportunity.
Rhonda Abrams is the author of “Six-Week Start-Up” and “What Business Should I Start?”
