Several private investors reveal what it takes to win their money.
Hands On: Growth Capital
Ask cash-strapped entrepreneurs what their companies need and they'll likely speak wistfully of angel investors. Translation: they're hoping some wealthy individual will invest money in their companies without raising a lot of questions. Passive "angels" like that exist -- but good luck finding them.
These days you're more likely to encounter a savvier breed of private investor. "We're seeing a big influx of cashed-out entrepreneurs who have the money and the know-how," says Jeffrey Sohl, director of the University of New Hampshire's Center for Venture Research. The modern angels often don't invest alone, and they generally do formal due diligence. Some turn to networks that match investors with entrepreneurs: at last count there were approximately 12 active not-for-profit angel networks around the country. Others hook up with the hundreds of loosely knit investor groups that scrutinize entrepreneurs and business plans. The Small Business Administration may even link 8 to 10 angel networks on the Internet.
Don't expect to interest sophisticated angels without at least a solid business plan with an executive summary. Entrepreneurs should also be prepared to supply a seemingly endless list of references. But while the new angels are making more demands, they offer more expertise as well.
In short, what used to be an informal arrangement between acquaintances is beginning to resemble the venture-capital world. Still, no two angels are alike. The key to success is understanding your angel's needs.
THE SUPER ANGEL
Dave Berkus of Arcadia, Calif. Former Inc. 500 CEO Berkus typifies the new professionalized angel. He finds deals through his company, Berkus Technology Ventures; a CEO networking group; and two angel networks.
How he works: Last year, took 2 of 100 deals examined. Has 5% -25% stakes in 7 software-driven companies. Invests $25,000-$50,000.
Heavenly matches: Companies with high barriers to entry and a CEO who takes advice. Another must-have: sales projections of $20 million plus in five years.
Deals from hell: Businesses projecting astronomical growth. Also, "my interest wanes quickly if the entrepreneur doesn't have an exit strategy."
Care and feeding: Berkus is a director at every company he invests in. At one he keeps the books; at another he is the marketing department.
THE RETIRED-CEO ANGEL
Vincent "Buck" Bell Jr. of Radnor, Pa. After selling the $300-million-plus business he cofounded, Bell rounded up other entrepreneurial "retirees" to check out investments and named the group LORE (Loosely Organized Retired Executives).
How he works: Involved with more than 20 companies, many in software. Prefers $25,000-plus loans, convertible to equity. Invests individually and through LORE.
Heavenly matches: A nearby company with a tested niche product, an experienced management team, and an internal rate of return of at least 30% over five years.
Deals from hell: Entrepreneurs who have already lost others' money.
Care and feeding: Rarely takes a board seat but visits regularly and acts as an adviser.
THE DREAM ANGEL
Mary Burns of Taos, N. Mex.
The daughter of a successful entrepreneur, Burns has wealth coupled with a soft spot for company founders. She finds most deals through friends or a network of investors with a socially responsible bent.
How she works: Prefers ventures with a socially responsible mission and those led by women. Has backed nine companies (of hundreds considered) in a range of industries. Rarely invests more than $50,000.
Heavenly matches: Companies whose founders she truly likes. Before investing, she consults an informal pool of experts she's pulled together.
Deals from hell: Any companies where "I'm really not interested in what they're doing." Also passes on deals her experts pan.
Care and feeding: Doesn't demand a board seat but does expect periodic updates. "I do want to participate."