March 16, 2008

Angel Financing For A Home Based Business

Last week we looked at where successful companies found financing for a successful business. This week we want to look more closely at who the lenders and investors are who can help you stand and grow a home based business, specifically so-called angel investors.

Individual investors include two types of people: those who know you, like you, or love you enough to provide money with few or no strings attached (your most likely source), or successful folks who invest in businesses, because they believe it will beat the return they could see from more traditional investments. Often referred to as angels, these investors are a huge source of informal venture capital.

Angel Financing

Angels, in fact, appear to be the largest source of risk capital in the small business economy, but the extent isn’t well known, because transactions tend to be kept private. Some estimates put the annual volume of private investor deals in the $30 to $50 Billion range. The size of this capital pool dwarfs that of the formal venture capital community, which invests between $3 and $5 Billion annually.

The “average” private investor is 47 years old, has an annual income of $90,000, a net worth of $750,000, is college educated, has been self-employed, and invests (again, on average) $37,000 per venture. Most angels invest close to home, and rarely put in more than a few hundred thousand dollars.

Only one problem. Angels don’t wear signs proclaiming that they’re investors. But angels can be found among your family, friends, acquaintances, professionals, customers, suppliers, and even competitors. Some invest in groups with other angels (who, by the way, they’ll usually bring to the party to share the risk).

In some parts of the country, angel networks have formed to improve their access to deals, which of course means that the networks also can help you find money; but angel networks, like angels, tend to keep a low profile.

Most angel networks are non-profit organizations that charge between $50 and $1,500 to circulate your business plan to their investors. The average fees charged by the most successful of these networks is around $450 per year. Investors pay similar fees to belong to these networks which gives them access to business opportunities like yours. Some networks offer monthly forums where, once your deal’s been screened, it can be pitched to a roomful of potential angels. Due to securities laws, most angel networks don’t stay involved past the introduction stage. If an investor, or group of them, is interested in your deal, the follow-up and negotiations will be up to you and the investor(s).

But first, a word from the lawyers…equity transactions must comply with all Federal and State securities laws. Fortunately, the Securities Act of 1933 offers a number of exemptions which allow for relatively uncomplicated private placements when the deal and investors meet certain criteria. More about those later, for now recognize that even a seemingly harmless ad in a newspaper promoting your need for an investor or partner can get you into big trouble with the securities sheriff! Naiveté in such matters could cost you your company and worse!

Next week, a look at bank loans and what it takes to get one. “Pretty please” won’t help, but you do have to know how to ask in the right way.

For more help on small business loans, angels and other private investors, venture capital, government loans and grants, preparing a business plan or financing application, and other money management advice, check out our all new, fully revised eBook, Finding Money—Secrets of a Former Banker.

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