A look at the types of ventures angel investors are likely to put money into, and the kinds they'll never touch. The verdict? Think technology, have a niche, and hope the investor is familiar with it.
This year angel investors will sink $20 billion into young companies. Do their bets on the future tell us where business is headed?
Let's get this out of the way first. if you're auditioning for angel money, our advice is that you be terrifically smart, a brilliant manager, and facile in the intricacies of cash flow. It helps if you already know someone who is an angel investor, or at the very least know someone who knows someone who is an angel investor. It wouldn't hurt if your business was built around some leading-edge proprietary technology in a market no other company dominates. And, of course, it's always nice if you can offer your prospective benefactors a clear exit strategy--since they'd like to cash in on their investments in, oh, say, five years.
Anyhow, that's what leading angel investors--those individuals or groups who invest their own money in private companies--told us when we asked them where they're currently placing their bets. Our theory was that because they're gambling on which businesses will have lucrative futures, their bets might reveal something about what the future business landscape will look like. Turns out that wasn't the best theory we've had (for reasons that will become clear), but we learned an awful lot about how to appeal to those folks anyway. And also about how not to approach them, since they also told us, "Please, please don't publish our phone number." I guess they figure if you're really smart, you'll know how to reach them.
Not that that's always hard. Take, for example, the case of celebrity angel, Microsoft cofounder, and Portland Trail Blazer owner Paul Allen. He makes it easy to find him, by posting his investment criteria (think technology) on his Web site, the Wired World of Paul Allen. He tells you right off what's not on Paul Allen's hot list: film production, themed amusement parks or restaurants, music acts, or record companies. You're encouraged to complete and submit his on-line inquiry form asking, among other things, that you categorize your business (think technology). You must also submit a rationale for why your idea fits into Paul Allen's Wired World strategy (think technology). That done, you're to stand by your E-mail, since Wired World personnel will contact you within 30 days if they're adequately intrigued and will then ask you to submit (submission seems important to these folks) your written business plan.
All right, so Paul Allen's a long shot. What do other angel investors want?
They want businesses that have market dominance from inception. "The ones we avoid at all costs," says Dick Morley of the Breakfast Club, a group of five or so angels in Milford, N.H., "are people who come to say, 'We can capture 1% of the personal-computer business--and that's a jillion dollars.' "
And did we mention technology? Hands down, angels are looking for companies involved with things like software, electronic commerce in developing nations, telecommunications, Internet phone service, or advanced-protocol technology. It's not that angels think those are the only new ventures that will thrive in the economic future (plenty of restaurants, temp agencies, and home-health-care services will make money, too); it's just that those are the types of companies that have the potential to deliver the return angels crave. Ideally, that's a "return potential of five times investment in five years," says angel George M. Richmond of Eastpointe, Mich.
Arcane as many of those high-tech businesses seem, most angels also will tell you that they vigorously avoid investing in industries they know nothing about. "It's easy enough to lose money investing in areas where you have some knowledge," says Stephen J. Gaal, founding member of Walnut Venture Associates, a group of 15 investors that includes a professor at Harvard Business School. Says Morley, summing up: "We want to go into businesses where we're not the dumb ones."
Of course, there's one more thing. To a person, each angel echoed Morley's observation: "You seem to think we invest in businesses. We do not. We invest in people." Gaal and his group look for "very smart people with very high integrity." And Nicholas Negroponte, a founder of the MIT Media Lab and an avid angel who is involved in at least 40 companies, insists, "I also bet on the jockey, not just the horse."
All right, let's say you've got the goods. You're sitting on the next big thing that every angel is going to want. So how do you find angels? Well, mostly you don't. They find you. "We try to stay hidden," Morley says when pleading with us not to give out his phone number. Angels network with friends and other professionals. Negroponte finds some of his investments through former Media Lab students. And Walnut finds its investments through "a deep referral network of entrepreneurs, venture capitalists, and former Harvard Business School students." Oh, don't worry too much--"serendipitous meetings" were also among the ways angels have met prospective investments. The trick is to figure out how to arrange those serendipitous meetings.
Which may be where networking--"deep networking," as angels call it--comes in. Which means doing whatever it takes to make yourself and your idea known by the people who know the people who have the money.
Even then, getting heard will not be easy--particularly if Negroponte is any indication. When asked what business he'd invest in tomorrow, he replied, "Electronic noise cancellation on a personal, local, urban, and global scale." Not being one of the smart guys who are likely to get his money, I asked him what exactly he was talking about. His response:
It's the technology of issuing the equal and opposite sound waves so that you hear silence. Bose made a headset like this. You can make a pillow, coat lapel, chair and maybe even a room. A motorcycle could be made to be silent, as could a pile driver. I would invest not just to get rich, but to find more peace and quiet on this planet.
So, even if you know people who know angels with wads of cash, and you're very, very smart with a very hot, very proprietary technology product--and you broadcast that loud and clear--some angels won't want to hear you.
Jeffrey L. Seglin is an executive editor at Inc.