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I started my business earlier this year with loans and money from friends and family. We are doing well and would like to expand, but we need additional funding. We're not large enough to attract venture capital, and I don't want to increase my bank debt. What are "angel" investors, and how can we interest them in our company? --A.R., Boston
Contrary to the sound of it, "angel" investors do not earn their wings by dropping money from the sky. They are wealthy current or former business owners motivated not by philanthropy but by the desire to achieve extraordinary return on their investments in entrepreneurial companies.
Most institutional investors and venture capitalists put their money into expanding businesses that are already proven winners. Angels, on the other hand, are more willing to invest in startups they deem good prospects -- but that may not have already achieved profitability.
WHERE THE ANGELS ARE. Because such companies generally make for highly risky investments, angels expect to become personally involved in helping the company succeed, and they expect to reap rich rewards for their time and money. (The term "angels" in this context originally was used to describe financial backers of Broadway plays early in the 20th century. Back in the 1980s, it also began to apply to wealthy individuals who support entrepreneurial ventures.)
Most angels operate independently, but they do come in groups as well. You can find a listing of these approximately 225 groups, organized by region, at the Angel Capital Assn. Web site.
Because these hands-on groups typically like to promote the vitality of their local business communities, most angels invest in their own geographic areas, says John May, a longtime angel investor and co-founder of the Dinner Club, a group of 60 angels who collectively invest in early-stage ventures in the Washington, D.C., area.
EXTREME PRESSURE. Before you go looking, you need to make sure you and your business are ready to take on an outside partner.
"You have to be ready to partner with a funding source who will primarily be interested in a return on investment. It's a big step away from friends-and-family money," he notes. The pressure for the company to perform up to expectations can be intense. "Our goal is to get three to five times the money we've invested within three to five years," May says, adding that his group typically looks to invest $500,000 in companies valued at as little as $1 million.
Talk to your attorney and accountant about the implications of bringing angel investment on board, then ask them to make introductions for you, or find someone who can. Individual angels are usually well-connected in regional business circles, and have a network of professionals looking out for deals for them, so if your company is a good prospect for an angel investor, it shouldn't be difficult to meet up with one.
FEW SUCCEED. Angel groups usually put specific criteria on their Web sites to explain what they're looking for in terms of potential investments, including company size, stage, region, and sometimes market, says Bill Payne, investment chair for the Vegas Valley Angels. "The process of submitting your company will be defined on the Web site, including the length of your application, what information to include on it, where you send it, and how quickly you will hear back," Payne says.
His group is looking for companies with the potential to grow to $25 million to $50 million in annual revenue within five to seven years of their investment. "It's difficult to imagine the level of risk of these investments. Almost all of our ROI comes from one or two out of every 10 investments. That's why we need companies that can really scale up," he says.
Richard Wingard, co-founder and CEO of Euclid Discoveries, a video-processing and compression-technology R&D company in Concord, Mass., has raised $13 million over the past six years from more than 80 individual investors.
BONDING WITH INVESTORS. "The main thing they are looking at is an exit strategy for the investment. They don't always understand the technology, but they can tell if you know what you're doing, if you have the right team on board, and if you have a compelling value set," Wingard says. The early money is the most difficult to get, and communication is key. Wingard's partner does investor relations full-time, he says, and he devotes about 20% of his time to the same endeavor.
"I have a great investor who owns a milk-delivery business in Georgia, " Wingard says. "I regularly fly to Atlanta, rent a car, drive three hours through the dusty backroads of southeastern Georgia, go around to the back of his house, and sit there on the porch with him, yucking it up. It takes that kind of personal time and commitment to get these people to take the leap of faith that's needed."
Additional information from John May and other angel investors is available online at the Kauffman eVenturing Web site, launched recently by the Ewing Marion Kauffman Foundation, a private, nonpartisan group that works with partners to advance entrepreneurship in America.
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Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues
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