Investments with Wings

March 11, 2009sparxoo_admin

Financing Your Business: Angel Investors

By Ethan Lyon, Senior Writer

In today’s business environment, we need someone to look after us. Bad things are happening everywhere. And the climate is volatile–with winds that can knock down the Dow 381 points one day and up 379 another day. The future is uncertain and no one has a crystal ball. But angels can be your guardian–to guide you, through funding and real-world experience–to make your business future more secure.

Spin

Angel investors can be a valuable asset to your start-up business that provide funding to get your business off the ground. For early stage companies, angels may be a better alternative to venture capital firms because Angels may be more willing to fund early growth with sums of money in the $25-50k range but can go to the million dollar mark.  This is in contrast to venture capital firms who typically invest in rounds of at least $2 to $3 million in companies that have demonstrated progress or show promise.

Often, early stage companies will arrange for several angel investors to fund their early development.  As you select your Angels, consider how they plan to be involved.  Some angels may add value in the form of contacts and advice while others may micro-manage and actually drain resources from the company.  Consider that while you might need funding badly, you could end up with an investor that is going to make the next five years of your life a living hell.

Law of Attraction

Types of Angels

There are many different types of angel investors. We’ve highlighted the top three:

Riding the Comet
With investing, there are leaders and there are followers. Let’s say Warren Buffet wanted to invest in your business. You better believe that his involvement, even at $100k, would generate the buzz necessary to line-up investors with wallets open. This is called the celebrity effect. These celebrity investors know that they are a stamp of approval and may expect better terms than your run-of-the-mill angel. Their expectations will range from board seats to higher equity stakes and other special treatment. In many cases, it is worth it.

Making the Connection
Investors that are well connected are a valuable asset to have on the team. Well-connected angels can be a starting point when organizing your team. They have an extended list of contacts that can lead to more funding, experts, customers, publicity, and more. Consider them a gateway to future opportunities.

Power by Numbers
Another strategy is to attract significant interest from many parties.  It’s always better to generate too much demand from angels.  You’ll have more control in setting terms and will have more choice on selecting those angels that will add the most value.  With a larger pool of angels invested in your company, you will have more potential sources of funding should you require additional capital.  On the other hand, you will also have more people questioning your progress.

Finding Angel Investors
Angel investors are often organized in local, regional or national networks. Depending on the type of business, some angels are more appropriate to target over others. For example, if your business is a café, a local angel might be the way to go. However, if your plans are much larger, such as a new coal technology, you might want to contact angels in a national network.

Looking Towards the Future

Angel investing isn’t going anywhere. There is still opportunity in angel investing. Whatever you might think about investing, businesses will still be born, even while they might be dropping like flies. Some companies will be born from the crisis, others will wade through it. Whatever the result, there will be angel networks to go to for that first round or second round of funding, so when you have the breakthrough idea, someone will give you the ability to take off.