Funding for entrepreneurial businesses has completely dried up, right? Wrong. Angel investors -- long a tried-and-true source of capital for young businesses -- have not hung up their wings.
It pays to think like an angel -- investor, that is. Angel and author David Amis explains what you need to know about getting financing in these tough times.
Rome's burning.
The Nasdaq's falling.
Dot-coms are still dying.
And long forgotten are the days when going public seemed as easy as ordering a cup of coffee.
So you can't blame some investors and entrepreneurs for thinking that now is the worst of all possible times to get start-up financing. They say owners of new companies can no longer go to venture-capital firms for a quick financial fix. Nor, the pessimists add, can entrepreneurs rely on angel investors, wealthy individuals who seek businesses to invest in and mentor.
While some of the pessimism is warranted, much is due to confusion over the relative roles that VCs and angels play in financing companies. Contrary to common wisdom, the two groups are not interchangeable. Angels, who are often cashed-out entrepreneurs, invest money of their own, typically the $250,000 to $500,000 that companies need to get off the ground. VCs, by contrast, invest mostly institutional funds, and they typically come on board later in a company's life, supplying the $1 million or more needed to keep both early-stage and midstage companies going.
Although VCs have sharply reduced their investment activity in the past year, angels by and large have not. That said, tough times have caused some angels to retire from the scene. Perhaps 10% to 15% of angels have recently hung up their wings, estimates Jeffrey E. Sohl, director of the Center for Venture Research at the University of New Hampshire. But most of those angel dropouts weren't experienced entrepreneurs; instead, they were professionals who'd made a killing on Wall Street. "They could make the investment," says Sohl, "but they couldn't bring the important knowledge to help the start-up."
Those angels who remain are investing at levels similar to last year's, encouraged in part by lower company valuations, which let angels do more deals with the same money, explains Sohl. In fact, angels will invest an impressive $30 billion or so this year, he estimates. While that figure doesn't match the roughly $40 billion angels invested during the height of the dot-com boom, it's still a hefty bundle. In fact, says Hans Severiens, a veteran angel and founder of Silicon Valley's Band of Angels investment club, current investment levels should not be compared with what was essentially an aberration. Instead, he advises, "think of this as it was four or five years ago."
So what does all that mean for entrepreneurs? For starters, the ball is back in the angels' court. Angel investors are once again reviewing potential deals carefully. They're studying business plans, requiring mature management teams, and really doing their due diligence. They're asking entrepreneurs tough, even embarrassing, questions. "What right do you have to run this business?" asks Severiens as an example. "How the hell do you know what you're doing?"
As a result, it now takes entrepreneurs longer to find money. Figure on at least six months, as opposed to the quick three months or less entrepreneurs recently enjoyed, says Severiens. Investment horizons are back to normal, too: angels now expect the companies they invest in either to go public or to be acquired in a reasonable five to seven years, not an artificially contracted one or two years. For entrepreneurs that means shifting the emphasis from cashing out -- what angels call a "liquidity event" -- to the business itself. "You're not building exit strategies now," says Sohl. "You're building companies."
So how do you go about getting financing from the newly sobered group of angel investors? You need to think like an angel yourself. Approach angels with a full understanding of what they like and don't like, what they need and don't need, and how they make and sometimes lose money.
If it's true that it takes one to know one, David Amis is your man. An angel himself, Amis has invested in 15 start-up companies. With Howard Stevenson, a Harvard Business School professor and angel investor, Amis wrote Winning Angels: The 7 Fundamentals of Early Stage Investing (Financial Times Prentice Hall, 2001).
While the book is a practical guide for angel investors, it also can be read as a playbook for winning over angels. You'll have a much easier time getting financing if you know what the people with the money require before they write you a check. Take Amis, for example. Within seconds of shaking your hand for the first time, he has already put you in one of three file folders he mentally carries at all times. No matter what your company does, no matter how charming and smart you may be, you are, according to Amis's personal classification system, one of the following:
A LIFESTYLE ENTREPRENEUR. You enjoy owning your company, working for yourself, and living your self-directed lifestyle. Making sure your pleasant existence continues is more important to you than creating the next billion-dollar company.
AN EMPIRE BUILDER. You love your company's growth rate. Truth be told, you also love being the ruler of your domain, small though it may be -- and it won't be small for long! You wouldn't sell the company if your life depended on it. They'll carry you out with your boots on.
A SERIAL ENTREPRENEUR. You'll expand your company to the best of your ability, sell out or go public, then start another com- pany. Then you'll do it again. And again.
If you fall into one of the first two categories, Amis will be happy to make small talk with you. But only if you fall into category three -- that is, you're a serial company builder -- will he consider investing in you and your company. Amis wants to invest only in people who plan to first get big, then sell out. In fact, all things being equal, the time frame is less important to Amis than is the entrepreneur's commitment to cashing out.
