Entrepreneurs’ quest for capital is never ending. Capturing this capital is part of the challenge of building a sustainably profitable company. So even after you pitched your business plan and outlined all the reasons why angel investors should invest in your company, obtaining angel financing isn't easy. So then, what is the best way to secure angel investment?
Start by networking. Seek out the right connections to potential investors by attending investment forums, small-business education programs, business-plan competitions, social gatherings and other events where individuals interested in inventing congregate. Most of these activities and events are in your backyard, so you’ll find them by staying local. It is appealing to go elsewhere where the grass (i.e., “money”) is perceived to be greener and more plentiful. With some exceptions, angel investors tend to invest close to home. They do so because they want to provide guidance, provide help when and where they can, and keep tabs on their investment.
Next, ask people in your network if they are interested in investing in your company. Or, know of people who invest as angels. It never fails to talk to other entrepreneurs who have succeeded in securing angel (or venture capital) financing. These are the people who can steer you in the right direction. Ask attorneys or accountants who deal in the private equity field for referrals. Bankers might know angels for you to contact. As an angel investor myself, I can attest that most (all?!) angels invest in opportunities that have been
recommended to them.
Do not discount going online to find angel investment, but do so cautiously. Your connection with an investor might only be a click away as more online tools are cropping up to match entrepreneurs with like-mind investors. Sites such as GoBigNetwork.com, RaiseCapital.com and FundingUniverse.com are specifically designed for small companies seeking investor capital. Many sites offer advice and allow entrepreneurs to post business plans and make email or video pitches to investors.
Proceed prudently if you follow this approach. You never know who or what is trolling on the internet. Their intentions might not be so legitimate or professional. So remind yourself, as I do, of a cartoon from The New Yorker magazine. The cartoon features two dogs at a computer terminal, where one dog says to the other, “On the internet, no one knows you’re a dog.” Don’t be a turkey getting skunked by a dog. If an investor’s promise and investment terms sound too good or too easy to be true, they are. Raising capital is never easy. Or comes cheaply.
Angels often pool resources with other angels, forming angel groups or networks to minimize risks. Many groups have websites that outline their area of interest and investment criteria. Many Gainesville-based angels align their activities under the Emergent Growth Fund banner. Band of Angels in Menlo Park, CA invests in seed-stage high-tech companies with strong teams, proprietary technology and big markets. New World Angels in Boca Raton focuses on South Florida's early- and mid-stage companies. Silicon Pastures of Milwaukee looks for high-growth companies in Wisconsin's core industries of traditional manufacturing, high-tech and biotechnology. Most groups have information available online detailing how to apply for funds; be aware that some require an application fee (usually ranging between $100 and $250) to submit business plans.
For a start-up with outsized dreams, winning a deal with angels is often a precursor to bigger investments by venture capitalists. But before that occurs, work smart to secure angel capital. According to Susan Preston, author of Angel Financing for Entrepreneurs and an angel herself, an angel wants to see the following before making an investment:
· A solid potential for return. Angels want to know how the company makes money, when it will turn profitable, and when they can expect a return on their investment. You'll need to back up those promises of profitability with income statements (also referred to as a profit/loss statement), a balance sheet and cash flow statements.
· A well-defined exit strategy. Investors want to know exactly how they’ll make a return on their investment. Saying "IPO" or "acquisition" is not enough. Research how other companies in your industry generated profits for investors. Identify potential suitors for your company. Work smart and tirelessly to become as profitable as possible, as soon as possible.
Note: Portions of this post include sections found in The Wall Street Journal Complete Small Business Guidebook (Three Rivers Press).