Many people looking for money for their business have questions about Angel Investors. Questions like:
1. What do they invest in?
2. How does the investing work?
3. Where can you find them?
Here's the answers:
1) Simply put, angel investors invest in the types of businesses that interest them. That can cover a wide range of business types and industries.
Typically though, "serial angels" (those sophisticated investors who routinely put capital into many businesses) tend to prefer those they have experience in. They usually are looking for high growth businesses. "One shot" or main street type angels that limit their activities are often local business people or professionals that have some extra capital to put to work as investments in businesses in their area and may not do things on the scale of a serial or professional angel investor. They may consider smaller opportunities or lower growth type businesses that are local to them, where the entrepreneur or business owner shows them their business is viable and has opportunities, and they have access and can observe how the business develops.
2) Usually an angel investor is a straight equity investor (or places the funds with you as convertible debt).
That means they buy part of your company (the stock) for part of the ownership. Depending on their own requirements that may be a minority position (less than 50%) or majority position (51% or more). Rarely would you see a 50/50 split and frankly that is not a good position to be in since no one has clear control of the business direction if it came down to a ‘vote'. As a business owner unless you have some real compelling reason to do it ... never give up more than 49% of your business to investors. My opinion of course.
With more sophisticated angels, you sometimes will see them (and VC's) use a convertible note (sometimes called a debenture) to secure the capital they put into a company. That means they put the money in as debt (loan the money to the company) and in return get paid back with interest ... since their money is at significant risk (especially if you are new company or start-up) they want it structured as debt so they can recoup some of the money if the business fails. When a business fails creditors sometimes have a shot at getting some money back by seizing assets and selling them to re-pay the debt or going after any personal (non-business) collateral if tied to the debt. Equity investors do not have any recourse if the business fails. But if the business has real growth prospects, the note will probably have conversion rights so that if the business succeeds they can change their debt to equity (stock) in the company. That is the "sweetener" in the deal for the angel investor and often is referred to as an "equity kicker".
3) You can find them by searching online for "angel investors".
You will find a lot of web sites but will need to sift through them all to find the ones that are direct contacts (not intermediary or venue sites that sell you access to the investors) and to find the ones that are going to be interested in your type of business. You can find them on your own but it does take work on our part. You can also search this site and find other info on angel investors that might be of interest or informative.
4) You can find them through making personal connections. But first a few things to understand about this:
Angel Investors fall into four categories:
- Financial - investors who are the true "money" people. Their interest is strictly financial, and they have little if any interest in providing any "hands-on" help with the business.
- Operations - investors who are often retired executives from large corporation that bring money and management experience to early-stage companies.
- Industry - value-added investors who put their capital to work in companies that are in industries where they have specific experience. Often they are executives (possibly retired) with long-careers in a single industry.
- Entrepreneur - investors who started their own companies, made good money and use some of it to invest in early-stage companies. Often they learned the "ropes" from an angel investor that put money into their start-up(s).
Where do you find them?
Unless you have a very strong background and/or a high-growth significant business opportunity that you've got past the "idea" stage ... your best bet will be to look for an angel type investor that is close to you geographically and more of an "Operations/Industry/Entrepreneur type like I outlined above that has interest in your area and the industry you chose. The reason being is, let's say for example you are in Alabama and you contact an angel investor in California. They probably are not going to give you much of a chance to pitch them on your idea unless you can give them something compelling and of size and scope to catch their interest. "Financial Angels" may feel the same way.
Small deals just don't travel well.
If your venture is smaller scale or more narrow in scope your best bet will be to locate and contact angel investors in your area or work the sources and prospects in your area that may "become" an angel type investor for your company. One way to approach this type of an effort for smaller ventures or businesses is to do the following:
Make a list of every one you know that is an either a retired business owner, or retired executive or manager. If you don't personally know anyone, then begin to work the people that you do know and see if they know anyone retired with that type of background.
You can also use an industrial database or directory to search for companies in specific industries and specific geographic areas outside your own immediate area or area you plan to service (I use several but like Thomas Register,
http://www.thomasregister.com/ the best). Look at the profiles you find on the companies and find the executives/owners or management team.
By doing the above, build up and develop a list of names and contact information of retired managers, executives and business owner's in your area or industry executives/business owners outside your planned area of service.
Your plan will be to call or email them and briefly introduce yourself. But NOT to solicit them to see if they are interested in investing money in your business! There is a "right" and "wrong" way to do this. By doing it the "right" way you may be able to line up interest in your venture at a couple of different levels that will be of benefit to you!
I hope the above helps you in some ways. There's a number other articles/postings on this site and my website that might be of help to you as well.
Dennis Lowery
Adducent, Inc.
