Are you in need of seed money to grow your newfound venture? Call zealously upon angels. Not the winged cherubs of religious artwork, but private investors who want to help entrepreneurs get their businesses off the ground. In today's tight economic climate, angel financing continues to fill in the gap in start-up capital between family, friends, and yourself.
Angel investors are estimated to provide 90 percent of all seed and start-up capital, compared to the venture capital community, which invest less than 2 percent in start-ups and instead focus on a smaller pool of later-stage companies, according to William H. Payne, an angel investor and entrepreneur in residence with the Ewing Marion Kauffman Foundation, a Kansas City non-profit that promotes entrepreneurship. There are at least 250,000 angels active in the country, funding about 30,000 small companies and investing $20 billion to $50 billion a year, estimates The Small Business Administration.
The potential pool of angel investors stands at about two million people in the United States with the necessary discretionary net worth. Typically, angles are retired executives and successful business owners who invest in new companies in exchange for equity ownership—anywhere from a 5 percent to 25 percent stake in the business. An entrepreneur with a good idea and business model can look to an angel to put up from a $150,000 to a $1.5 million investment. In addition to equity, most angels seek an annual return between 15 percent and 20 percent over a five-year period.
Angel investors are located just about everywhere. But they are generally hard to find. "Most solo angel investors fly under the radar because they rely on other angels and experienced service providers for deal flow," says Payne. However, he notes in recent years several business groups have created networks of angel investors.
Most small business owners find angels through word of mouth. But more entrepreneurs are finding creative ways to get introduced to private investors from using angle networks to appearing on national television.
Mike Williams, CEO of Reality Gap, has successfully secured angel financing. In the last two years he has raised a total of $7 million; that amount represents 62 individual angels all together.
"But to finds those angels, I presented my business to more than a 1,000 potential investors," says Williams. It was mainly through network groups like A Gathering of Angels, the Keiretsu Forum, and North Bay Angels that Williams secured funding. "I was willing to go all over the nation," he says.
Launched in 2007, Reality Gap is a Seattle-based video game publisher of massively multiplayer online games and innovator behind MetaTIXTM, a turnkey currency system for virtual worlds. The company is just starting to release its products, grossing sales revenues less than $100,000 in 2009. New titles include Monato Esprit, a 3D online role playing game and Battleswarm Field of Honors, a combat strategy game that pits first-person shooters against real-time strategists in epic online battles.
"We were literally able to build the company from scratch using angel money and we are just now finally trying to sell it to the public," says Williams.
Williams and business experts agree the most effective way of finding and meeting angel investors is to actively seek them out and to have a planned approach.
How to Meet Angel Investors: Try A Matchmaker
Angel networks make for some of the best matchmaking between entrepreneurs and investors. Each angel network operates slightly differently. Some are free while others charge for consideration of an application or require a pay to pitch fee. An entrepreneur may shell out $50 or $5,000 for a 15-20 minute presentation before investors.
For instance, The Gathering of Angels holds monthly meetings in a number of different cities nationwide. For a $2,500 fee, six companies get to present a 20 minute PowerPoint presentations each followed by two to five minutes of Q&A. The Keiretsu Forum, which has 850 accredited investor members throughout nineteen chapters on three continents, hosts an Angel Capital Expo that allows 10 start-ups to connect with and pitch to potential backers. North Bay Angels is a membership organization that provides opportunities for business owners and inventors to get together. The cost is a one-time initiation fee at $425, annual dues of $350 and $75 per dinner meeting, held every two months and allows for two company presentations.
Surfing the Web can provide fast and effective ways for small business owners to hook-up with angel investors. The Go Big Network is a marketplace that boasts a community of 20,000 plus investors and 250,000 start-up companies. Entrepreneurs can post and search profiles for free. But it will cost a one-time annual fee to advertise a funding request to investors or contact investors directly in the database.
A free online network is Go4Funding, which pools together entrepreneurs and prospective investors from around the globe. Business owners can post their capital requirements, while investors can post their profiles. Both parties have an opportunity to learn about each other for a possible match. Go4Funding also allows business owners to upload images and videos of their pitches.
For a compiled list of angel groups nationally and according to geographic region, visit the Angel Capital Education Foundation.
Dig Deeper: How to Find Willing Investors
How to Meet Angel Investors: Join A Business Boot Camp
There are business acceleration groups rooted in business incubators that hold boot-camp-style programs that provide initial seed money and mentoring services. One such program is Philadelphia-based DreamIt Ventures, which offers select companies between $10,000 and $25,000 in return for a 6 percent passive equity stake. Entrepreneurs simply need to complete an online application and must be willing to live and work in the city of brotherly love for three months. Upon completion of the program, DreamIt sets up opportunities for entrepreneurs to present to investors.
TechStars is another mentorship-driven seed stage investment program. TechStars operates three months at a given time in four cities: Boston, Boulder, New York City, and Seattle. Class-size is limited to 10 companies that each receives up to $18,000 in seed funding and a chance to pitch to financial backers.
Dig Deeper: Angel Investor Directory
How to Meet Angel Investors: Get On Television
It was an appearance on the ABC's Shark Tank that helped CEO Sean Conway secure financing and give credibility to his company NoteHall.com, an online marketplace for college students to buy and sell call notes and study guides. Shark Tank is a reality television show that gave 45 budding entrepreneurs a chance to convince five self-made, multi-millionaires (the Sharks) to part with their hard-earned money.
A 2007 graduate of the University of Arizona, Conway along with fellow alum Justin Miller used $70,000 they put together from savings, early inheritance and bar mitzvah money for initial funding. But a year into the venture they were broke and investors were skeptical about investing in the Tucson-based firm.
Conway applied to be a contestant on ABC's Shark Tank, appearing on the show in October 2009. He was offered $90,000 from real estate mogul Barbara Corcoran, after agreeing to give up a 25 percent equity stake. Even though Conway decided to go with a much larger investment with a different evaluation outside the show, his television appearance led to several e-mails and calls from people wanting to partner with the company. Conway also participated in the DreamIt Ventures program and secured $500,000 in investments. NoteHall.com expects to reach $900,000 in revenues this year.
A second season of Shark Tank is slated to air in early 2011. ABC is casting now for the next round of entrepreneurs who can apply online for an opportunity to pitch their business concepts, products, properties and services. The Sharks ended up making 20 deals with investments totaling over $4 million during the first season. But these moguls aren't just out to invest; they too have a goal—to own a piece of the next big idea (sometimes as much as a 50 percent ownership stake).
Dig Deeper: 9 Tips for Winning Over Angels
How to Meet Angel Investors: Ask Around
The old fashion way to meet angel investor is through word-of-mouth. Check with your personal contacts such as your lawyer or accountant. Any business associates and acquaintances that may have clients who are accredited investors.
If you don't already belong to an industry-specific professional organization or trade group then join one, says Williams. Attend meetings, conferences, and social events on a regular basis. Successful business owners will be able to point you in the direction of investors. Get to know who they know.
Also attend investor fairs and make presentations at these gatherings. Your local SBA office or local university business school can provide information on such events.
Dig Deeper: 5 Questions for an Angel Investor
How to Meet Angel Investors: Expect to Get Scrutinized
While each network or group may have varying requirements for meeting angel investors, all have a similar extensive screening process. The average angel accepts three deals for every 10 considered. The goal of making contact with successful industry investors is to make a good impression and get an opportunity to present your pitch.
Anything that doesn't appear realistic in the initial application will get kicked back or rejected, says Ravi S. Pemmasani, managing member of Go4Funding.com. For instance, stating that your company doesn't have any competition raises a red flag for investors. An angel investor also should be able to understand your business model during the initial contact, which could be an online profile, he adds.
As with every personal relationship, it is best to locate a common ground with a prospective angel, says Williams. "It is also important to follow through any leads that have been established."
Dig Deeper: Angel Financing: Dos and Don'ts for Entrepreneurs