You've probably heard the rumors: Angel investors aren't as angelic as they used to be. Such investors, generally wealthy individuals, have been essential to American entrepreneurs, betting on early-stage ventures that frighten most other investors. But angels are getting a lot harder to please. And that has implications for any entrepreneur seeking seed funding.

The good news is that angels are picking up much of the slack from venture capital funds, which are increasingly focusing on later-stage outfits. Last year alone, 42,000 angels plowed $18.1 billion into early-stage companies, compared with a mere $304 million plunked down by VCs, according to a recent study by the University of New Hampshire's Center for Venture Research. But while angels have always had high hopes for the companies they invest in, these days they rely a lot less on their guts than they do on the facts, says David Rose, chairman of the New York Angels, a 50-member group in Manhattan.

Not surprisingly, the shift dates back to the dot-com crash -- which made all investors more risk-averse. As a result, most angels are interested only in companies that are likely to post positive cash flow within 12 to 18 months. "I want to know if I can double, quadruple, or increase my investment tenfold in five years," Rose says. Unless you already have a service or product, a few customers, and an exit plan, that's not likely to happen.

Rudy Prince learned that lesson last year when he began drumming up financing for Always On Wireless, the telecom start-up he founded in Houston in 2003. Back in 1988, Prince had landed $500,000 from angels for his first company, JetFax, so he thought he knew what to expect. JetFax's product -- software that lets users send faxes over the Web -- was little more than an idea on paper. But the angels had no problem signing on. This time around, Prince had a fully developed product -- the WiFlyer, a gadget that lets dial-up users connect to the Internet without wires. What's more, Prince and his partners had already ponied up about $200,000 in seed money, so they were asking angels to participate in a first round of investing, which is considered less risky than standard angel deals. Nonetheless, he says, the angels he talked to were extremely skeptical. "They're no longer relying as much on leaps of faith when it comes to investing," he says.

Still, by waiting until his start-up was perfectly positioned, Prince increased his chances of landing an angel deal. After Prince tapped his network of friends and business associates, a friend introduced him to a group of former telecom entrepreneurs, who plowed $1 million into Always On last July. The financial terms weren't much different than they had been in '88. Both groups of angels, for instance, expected returns equal to between five and 10 times their initial investments. But today's angels weren't willing to wait. JetFax's angel investors didn't receive a return for nine years, when the company went public in 1997. This time around, the pressure is on for Prince to make an exit within five years. With IPOs harder to pull off than in the late 1990s, Prince plans to focus on finding a buyer. He would not disclose the equity stake his angels received in the JetFax and Always On deals. But, in general, angels have always expected to get 25% to 35% of the company stock. Of course, the value of the stock varies depending on the market value of the company's assets, and, since Prince's first business was less mature, it garnered a much lower valuation than Always On.

Still, in one way at least, landing angel financing has gotten easier. Until recently, there was no clearinghouse for angels, making them difficult to find. Last year, however, the Ewing Marion Kauffman Foundation launched the first angel investor network -- the Angel Capital Association -- which has 60 members so far. Its website ( features a directory of dozens of angel groups, sorted by state and region.

Even though angels are getting tougher, they've remained true to their name when it comes to offering advice and support to entrepreneurs. "They bring a lot of experience and know-how to the table," says Prince. "They have a real interest in seeing you do well." Prince's angels, for their part, used their industry connections and expertise to help him bring the WiFlyer to market in time for the 2004 holiday season. This year alone, he expects his fledgling company to generate an impressive $10 million in sales. As far as Prince is concerned, he's found the perfect match. "If you can get good angels that offer more than a check, then you have found a great fit," he says.

Sidebar: Angels 101

Keep Your Options Open
To find the right match, tap a variety of resources, from friends to the local chamber of commerce.

Sing Your Team's Praises
Angels invest primarily in people, so tout the experience of your executives.

Choose Wisely
Before signing a contract, vet your prospective investors by calling their past business associates.