Angels - An Entrepreneur’s Best Friend

Entrepreneur's looking for funding generally start with family and friends to raise needed capital to begin their business operations or start development of their product or service. This is okay for raising a small amount of capital, but who do they turn to when they need to raise significant amounts of capital, say $200,000 to $1,000,000. The main choices are Venture Capital firms, banks (which will require hard assets and/or personal guarantees), or “ Angel ” investors.

If your management team does not need over $1,000,000 then you should probably focus on meeting with as many Angel investors and Angel investor groups as possible. There are numerous Angel Networks and Angel Associations located throughout the United States. Angel capital is usually available on terms that are more acceptable to management and companies can get funding in a shorter time frame.

Angel investors evolved as a result of wealthy private investors wanting to invest in start-up companies without having to invest through a Venture Capital firm. Venture capital firms usually have a five year lock-up, charge management fees and incentive fees and invest in companies without any input from their investors. Venture Capital firms also take significant equity positions (sometimes as much as 70%) in the companies they invest in, as well as management positions. Many Venture Capital firms now call themselves Private Equity firms, probably because of their Vulture Capital nickname.

Many Angel investors come from an entrepreneurial background themselves and want to be involved in helping start-up or development stage companies. They share your entrepreneurial spirit and your passion for success, as well as wanting to make a healthy return on their investment.

Somewhere along the evolution of these private investor groups someone gave them the honorary title of “ Angels ”. Angel investors typically take less control of your company, usually don't ask for management or director positions, conduct due diligence faster and can make their investment decisions quicker than Venture Capital firms.

Evaluate your choices carefully, however. Usually Angel investors are capable of funding $200,000 to $1,000,000 but anything above that may be difficult to raise from Angels. Also, they probably won't offer managerial expertise unless their background is in the same business field as your company. During your search for funding, you may need to talk and meet with many potential Angel investors. This will increase your chances of finding a few Angels who are willing to fund your start up company or provide the working capital or expansion capital you need.

In determining the amount you want to raise when you approach Angel investors detail in your business plan at least that amount that will get you cash flow positive. This is a common mistake many start-up companies make. They don't plan ahead for when they run out of capital and cannot sustain growth from cash flow. Going for a second round of financing when you couldn't achieve your goals with the first round will greatly reduce your bargaining power on financing terms and will probably result in loss of voting control of your company.

So again, carefully analyze the amount you need in your first round of financing. If you can't raise the full amount you need, you are probably best advised not to start out undercapitalized.