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ANGEL INVESTORS

The New Rules of Angel Investing

The capital required to launch a tech startup can be 10% of what it was 10 years ago.

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Today's capital climate is a fertile one for angel investors--and the entrepreneurs hoping to court them.

So says Ilya A. Strebulaev, an associate professor of finance at Stanford Graduate School of Business.

"Thanks in part to the plunging cost of technology, angels have enjoyed a growing competitive advantage in funding very early stage companies," he writes on the Stanford Graduate School of Business site.

Specifically, a startup that would've needed $5 million to launch 10 years ago can often launch for $500,000 today, thanks to open-source software and cloud computing, he adds. That means the time is right for entrepreneurs to court angels, who usually prefer smaller deals. 

So how can you persuade angels to invest in your business? Strebulaev offers several pointers: 

1. Look close to home. Even in a virtual era, it's important for investors to locate near their investments. "Most angel investments are within 50 miles of the investor, and angel networks are often in geographic clusters," writes Strebulaev.  

2. Angels will hunt for the fatal flaw in your plan. "You may have a perfectly reasonable plan for a $10 million business. But angel investors are looking for companies that can ramp up to $50 million or $100 million in revenues," he writes.

The upshot? Aim high. And build barriers to entry.

"Angels want 'disruptive' ideas that will upend existing business models. If your idea is disruptive, however, can you hold on to it? Can copycats and incumbents jump in as soon as you've shown the way?"

3. Your team may be more important than your concept--or even you. "Angel investors want people who can execute the plan. They will place heavy weight on not only your track record, but also your management team," he writes. Judging your credentials is just one part of it. Angels will also try to assess if your team can stay tight-knit through adversity. 

Strebulaev's article offers four more pointers on angel investors, based on his studies and firsthand observations.

IMAGE: Shutterstock
Last updated: Dec 21, 2013




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