September 1, 2011
By Rieva Lesonsky
Are you seeking capital to start or grow your business?
One source you may want to consider is angel capital. No, it doesn’t come from heaven — instead, angel funding typically comes from individuals or small groups who band together to make investments, says SBDC Business Advisor Nina Grooms-Lee.
“Angels are typically willing to take on more risk than banks,” she explains, “and typically provide very early-stage funding prior to the point where companies can qualify for bank or venture capital.” In terms of dollar figures, SBDC Business Advisor Mike Grimshaw says, angels can fund any amount from a few thousand dollars to $2 million. Above that, you’ll typically turn to venture capital.
How involved will angels expect to be in your company?
More involved than banks, but less involved than VCs. “Angel investors typically do not take an active management role in the companies they invest, but pick their investments based on a good management and creative team already in place,” explains Grimshaw. “However, they generally provide much more than just financing — including [advice], resources, contacts and personnel — because they want the company to be successful.” The flip side of this assistance, Grooms-Lee cautions, is that “angels typically will not be ‘silent partners’ .”
How do you know if your business is a good candidate for angel investment?
Grooms-Lee says angels target business models that scale well and provide a good return on investment. Currently, hot industries for angel investment include technology, biotech, medical services and appliances, green/eco-friendly products and services, and social media tools, Grooms-Lee and Grimshaw report.
Where can you find angels?
“Referrals from business contacts or the SBDC, angel capital conferences and local angel investor groups are all good sources,” says Grooms-Lee. Grimshaw recommends getting started by visiting www.angelsoft.com, where you can search for angel investor groups nationwide to find ones that specialize in your industry. Many groups hold meetings where entrepreneurs can pitch their ideas; often, you can apply for consideration online.
When you do get an audience with an angel, what does it take to earn their funding?
Be prepared to show you have a strong management team in place; a well-thought-out business plan; a realistic ROI for the angel; and a clear, concise pitch with a defendable value proposition. Demonstrating traction in your industry, such as initial sales, orders, patents or trademarks, can also give you an edge. Last, but not least, advises Grooms-Lee, “angels want to see that you have ‘skin in the game’ and have put your own money into your idea.”
Keep in mind that angel capital does have a cost since you will typically have to give up equity in your business. But the financing comes without the immediate burden of repaying debt that a bank loan imposes.
If you think angel capital is right for you, the time is right to start looking for your angels. After hitting a low point during the recession, angel investments are on the rise again. “Be constantly networking and pitching your company,” says Grimshaw. “You never know when an angel will step in and help out.”
Rieva Lesonsky is founder and President of GrowBiz Media, a media company that helps entrepreneurs start and grow their businesses. Before launching her business, she was Editorial Director of Entrepreneur Magazine. Follow Rieva at Twitter.com/Rieva, read her blog at SmallBizDaily.com, and visit her website SmallBizTrendCast to get the scoop on business trends and sign up for free TrendCast reports.