Pennies From Heaven, Money From Angels

Trying to start a new business inevitably requires start-up financing. (No not for business cards and letterhead, for marketing and product! What you need are customers!)

If you can’t get a bank or SBA loan, and family members or friends aren’t an option, then angel investors are your only alternative.

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The men and women with money to invest are a kind of venture capital in that they’ll let you have some of their money in exchange for a hunk of the business. No, they don’t just give you the money (we’re amazed how many people think that–but then 20% of the people in the US think the Sun rotates around the Earth too). But what if you just don’t know any people that have the kind of money and temperament to invest it in strangers, specifically you?

For starters, talk to your accountant, lawyer, or even your doctor to see if they know anyone. Don’t come off sounding like your asking them for money or the conversation could be short. “Do you know anyone that might be interested in investing in a new business I’m starting?” is a good approach. If it turns our they actually are interested, obviously they’ll say so. And if they have clients that might be interested they’ll tell you too.

It doesn’t hurt to align yourself with someone who can wow the finance / business community. Business is, well, business and it can be a dog-eat-dog world, but it is the sandbox you need to play in. Find someone who’s good at playing the game. The more seasoned the better. You want someone who’s taken a venture from startup to millions successfully. Use them as your front person while you do what you’re best at. But a word of caution: know who you’re dealing with. There are some scoundrels that will cozy up to you and your ideas, and then take you to the cleaners.

All of this describes a private investor or angel, specifically someone who brings more to the table than money. The average private investor invests about $40,000 per venture, and if you later need to raise bigger amounts of money the right investor can help you do that too. Most big cities have an economic development agency or university that organizes angel investors. There are also a few on-line angel networks.

Private investors or angels are successful folks who invest in businesses because they believe the returns they’ll receive will beat what they can make from more traditional investments. Angel investment is considered to be the largest source of risk capital in the small business economy, but paradoxically that doesn’t mean it’s easy to find. It would certainly make it easier if Angels would just wear signs proclaiming their interest in investing in businesses like yours. But, they don’t so you have to do a bit of detective work to track them down. Here’s a hint: if you go to venture forums where some organization brings investors and business owners together it’s a good guess that someone that doesn’t have a name tag on is an angel.

Most angels invest close to home. Often they’re people who know you or know someone who knows you. Most typically they can be found among your friends, family, acquaintances, professionals, suppliers, customers, and even competitors. As for the type of person you’re looking for, about 10 years ago the Center for Venture Research at the University of New Hampshire did a study that showed the average private investor: is college educated; 47 years old; currently or formerly self employed; has an annual income of $90,000; a net worth of $750,000; and invests, on average $37,000 per venture.

In many parts of the country, angel networks have formed to help bring investors and entrepreneurs together. Fees for these matching services are typically very low cost (less than $500) and are sometimes even subsidized by State funds. The most organized angel matching effort is Active Capital (formerly ACE-Net), a collaborative effort of the U.S. Securities and Exchange Commission, state securities regulators, the North American Securities Administrators Association, and the U.S. Small Business Administration’s Office of Advocacy.

One final note, you’ll really need a good lawyer to walk you safely through the process of raising money from investors. The laws are particularly sticky if you are raising money from someone with less than $1 million in assets or an annual income of at least $200,000 ($300,000 jointly with a spouse).

Though a bit dated, a good Inc. magazine article about where find angels is available here.

If you need help finding loans or investment money for your business, check out our all new, fully revised eBook, Finding Money–Secrets of a Former Banker.

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