Angel investors are wealthy individuals or groups of individuals who invest money
in start-up or early stage small businesses. They usually provide second-round
funding for small businesses. After family and friends, as well as the small
business owner, provide the seed money for start-up companies, the companies then
have to turn to either debt or equity financing in order to survive and move forward.
If debt financing is not available due to tight credit markets or the perceived
risk of the venture, then angel equity investing would be the next logical source
of financing.
What Qualifies an Investor to be an Angel?
Who are angel investors? They do not have to be accredited investors as designated
by the Securities and Exchange Commission (SEC). However, most of the money
coming from angel investors comes from accredited investors. Accredited investors,
as defined by the SEC, have to make at least $200,000 in income and have at least
$1 million in assets. Some angels are part of angel investing groups. Some
are on their own. Some angels are quite knowledgeable about investing in private
companies. Others fly by the seat of their pants. Some angels want to
be involved in the companies in which they invest. Others don’t care for any
or much involvement. Angel investors are not a homogeneous group.
How Does Angel Funding Work?
Angel investors often invest amounts ranging from $25,000 to $50,000 in small businesses.
For a second round of small business funding, this is much better than going the
venture capital route. Venture capitalists prefer to make very large investments
– in the millions of dollars. Due to the very high failure rate of small businesses,
angel investors require an exceedingly high return on their investments; often,
they require as much as 10 times to 30 times the amount they invest. Three
of the most famous companies that got their starts with angel investing are Amazon.com,
Starbucks, Inc., and Apple.
It is a reasonably complicated and time-consuming process to secure angel funding.
Angel investors are taking a huge risk on a relatively unproven venture. Angels
require air-tight business plans. They conduct due diligence, perform competitive
analysis, and eventually dismiss up to 90% of the applications they get. Small
business owners may have to make several rounds of presentations to the angel investor
or group to possibly secure their equity investment.
Where do you Find Angel Funding?
You can find your angel online or close to home. If you want to start your
research online, you can take a look at an Angelsoft, an angel investor network.
For a fee, you can make a pitch online. It’s also a good site just to look
through and find out what you need to do to make a pitch.
Many financial analysts, however, recommend that you try to find angel funding close
to home. Some angel investors like to be involved in the company in which
they invest. They may, for example, want a seat on the Board of Directors.
As a small business owner, you could use the expertise on your board and the access
to another potential round of funding. One way to find local angel funding
is to start at the website for the Angel Capital Association, which lists angel
investors by state.
Securing funding from angel investors is a difficult process. The odds are
long that you will be successful. However, you may make excellent contacts
for getting funding in the future. You may meet people who can give you valuable
business advice. Even going through the process of giving multiple presentations
is invaluable for the future. You may just secure that angel funding that
you need.