Nothing makes startup founders salivate quite like the thought of a cash infusion. Especially if you utter the phrase "angel investor." But what exactly can angels, who invest their own funds directly into early-stage businesses, do to help?
Plenty, says Dave Berkus, former chairman of Tech Coast Angels (and two-time Inc. 500 alum), as long as their pockets allow it. Here is a list of what angel investors can do for entrepreneurs, and what they can't.
What Angels Can Do
This point is obvious, but crucial nonetheless, as angels typically provide anywhere from $100,000 to $1 million, with the average being about half a million dollars, says Berkus. Individual investors tend to average a little less than what angel investing groups like to see, which is $50,000 a year. Regardless, "no entrepreneur should just take money,” warns Berkus. “There are too many groups of angels that can offer much more.”
Help With Time Management
As important as managing your money is managing time, says Berkus, before adding, "the faster to market and more efficient a company is, the less money is going to get spent.” An angel can step in to help a product get to market on time, train employees, and figure out what (and who) should receive resources.
Angels are known for opening up doors, be it to salespeople, mentors, or potential board advisers, says Troy Knauss, president of the Angel Resource Institute. Adds Berkus: "I have 1,500 contacts, most of whom I know personally. A young entrepreneur can't even begin to have that number." Connections are integral when creating a board of advisers to help steer the company, just as they're key when finding the right manufacturer to make your product at a lower cost. "If you have a biotech company, the angel investor might have connections that can help you figure out the path to get you to an earlier exit," says Knauss. Perhaps he'll also know how to get past regulatory red tape.
Sure, it's cheaper to get products to market than it was 10 or even five years ago, but most entrepeneurs are inexperienced at running a business. They're going to make mistakes, and each one is bound to cost money, says Berkus. An experienced angel brings expertise to the table that can make the company that much more successful. Some may even help draft a business plan, as Knauss did for one startup he worked with. "They were trying to raise $5 million in venture capital, but their plan showed they couldn't be profitable," he says. "So we looked at a different plan that let them retain much more and grow the company into something successful."
What Angels Can't Do
Supply Enough Money
"Angels will work with a company, sometimes in a sleeves-rolled-up manner that exceeds even that of a venture capitalist," says Berkus. "But most angels invest and expect that to be the last time." Although it takes a lot of money to become a private investor in the first place, they "can't supply enough money to get startups beyond the usual issue of breaking even and into the marketplace if the product or service requires a heavy investment," says Berkus. "They can only the prime the pump, and that puts the investor at risk, just like the entrepreneur."