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Saturday, March 06, 2010


Venture Financing - Reality Versus Rumor with Dick Brown

These are not the Biblical angels that the Christians inherited from Jewish lore … nor are they necessarily creatures of good, spirits of love, or messengers from “above” - blissfully flitting “on gossamer wings”. Historically, they’re more closely related to the “angels” widely known as the financiers behind Broadway productions and Hollywood movies. Universally, they’re not in it for religion or bright lights, but bucks.

Investor angels provide a large percentage of the seed/growth capital to companies in the US. They typically invest their own funds, unlike venture capitalists who use OPM (Other Peoples’ Money). Although an individual makes the final investment decision, the actual funding may be from their trust, business, limited liability company, investment fund, etc.

Angel capital conveniently fills the gap in start-up financing between "friends, family and fools" and the VC’s. It is unusually difficult to raise more than a few thousand dollars from the 3F’s and even small venture capital firms will not consider investments under $1M to $2M. Thus, as the biblical ones, financial angels bridge a gap … not between heaven and earth, but between two of the most common sources of capital available to most entrepreneurs.

Angel investment is a common second round of financing for high-growth start-ups, and accounts in total for almost as much money invested annually as all venture capital funds combined, but into more than ten times as many companies ($26 billion vs. $30.69 billion in the US in 2007, and into 57,000 companies vs. the VC’s 3,918 companies).1

Of the US companies that received angel funding in 2007, the average capital raised was about $450,000. However, there is no “set amount” for angel investors, and the range can go anywhere from a few thousand to a few million dollars. Software accounted for the largest share of angel investments, with 27 percent of total angel investments in 2007, followed by healthcare services, and medical devices and equipment (19 percent) and biotech (12 percent). The remaining investments were approximately equally weighted across high-tech sectors. Angel financing, while more readily available than venture financing, is still extremely difficult to raise.1

Investment Criteria
Angel investments bear high risk and can be subject to dilution from future investment rounds. Angels use about the same ROI formulas as VC’s and seek investments that have the potential to return at least 10 or more times their original investment within 5 years - as well as those that can execute a defined exit strategy.

Their Community
According to the Center for Venture Research, there were 258,000 active angel investors in the U.S. in 2007. According to the US Small Business Administration, the number of individuals in the US who made an angel investment between 2001 and 2003 is between 300,000 and 600,000.

Gradually, angels started to coalesce into informal groups with the goal of sharing deal flow and due diligence work, and pooling their funds to make larger investments. One of the first (and the best known) of these was Hans Severins’ formation of the Band of Angels in 1994 in San Francisco,

Perhaps typical of angel groups, the Band of Angel’s track record is noted on their web page: “The Band has invested more than $186M into 200+ companies since 1994. Of these 45 have been acquired for a gain, and 9 have gone public on the NASDAQ. The cumulative IRR for all band investments since inception, including the losses suffered through the bust, is a positive 18%”.

Such angel groups are generally made up of 10 to 150 accredited investors interested in early-stage investing. The more advanced of these groups can have full time, professional staffs; associated investment funds; sophisticated web-based platforms for processing funding applications; and substantial operating budgets. Some such as the NY Angels, (; founded by financial legend, David Rose; hand out more paperwork and forms to the new entrepreneur than comparable VC’s … and, have far longer waiting periods before being formally considered.

Today, there are dozens of angel groups, scattered across the US and other advanced countries, with varied charters and called a variety of different names. Even with the current recession, angel groups have grown like the Google’s cash flow. There’s hardly a city or university that doesn’t have an angel group. Just check on the Internet.

General Angel Characteristics:
  • They are business executives and owners.
  • The average age of an angel investor is 47. Few are younger than 35 or older than 65.
  • Most are white males and 72% have a college degree.
  • The average income is greater than $90,000.
  • The average net worth is $750,000.
  • Their average investment is $25,000 to $50,000 per deal.
  • Their acceptance of deals is around 20%. (They actually invest in 1 out of every 5 deals that they see.)
  • Only 1 in 12 is a lone investor. (For those weak in arithmetic, this means that 11 out of every 12 angels need someone else to invest in the deal with them.)

Types of Angels
These angels exist within the power structure of your industry or their own. They are most grateful for their success and often somewhat embarrassed by it. They are very willing to help newcomers to the game. Often they will devote almost excessive time, money and effort to help you succeed. They remember that early in their careers, someone once helped them. They rarely have “hidden agendas” and are close to your “perfect investor”.

Wealthy Individuals
There are many wealthy individuals who enjoy helping new businesses. The best candidates may also have an interest in the specific kind of business you are starting. Generally, they do not have formal investment evaluation criteria. They rely instead on instinct and on endorsement introductions from other successful individuals or advisors.

Most expect a handsome ROI over a relatively short period of time. Rarely do they intend to become permanent investors in the business. Wealthy individuals actively monitor their investments, and most frequently as board members.

They enjoy the social prestige of being benefactors to successful new businesses. Their personal contacts and business abilities are valuable resources.

“Corporate” Angels
There are many companies that are looking for new products and services to broaden their business markets. Depending on your venture, they may invest money, time, facilities, technical support and many other potentially valuable assets. They can move quickly … sometimes too quickly from the view of their own investors.

Biggest barrier? Political factions in their company playing “not invented here!”
Best advantage? Have the CEO like you.

What are the differences between the Executive/Entrepreneur and the Corporate Angel? The former invests their personal money. The latter uses company money.

The Entrepreneur/Executives and the Corporate Angels should be at the top of your list as sources of capital. In addition to money they have power, influence and many friends.

Even better, you can find them fairly easily. Every state has publications that list all the companies in the state, by region, by industry, by size, and other categories with the names of the executives and the phone/ fax numbers. Many of these publications sell the lists and in many cases on disks, already formatted for “lead tracking software”, such as Outlook or ACT.

Foreign Angels
If you can locate them, Non-US Citizens are perhaps the very best “pure” investors. They have no protection under most US securities laws. They live in another country. They rarely call you and usually don’t even bother showing up at the yearly stockholders meeting. The real ones are rich, usually naive, and simply trying to make money.

On the other hand, they are terribly hard to find and close, even over the Internet. And, you don’t know who they truly are … or, the real reason they want to invest in your company. And if they are “Bad Angels” or “Fallen Angels”, they are smart enough not to have their business cards read “Tijuana Drug Cartel, Mexico.”

Having opened this subject, the single largest problem for organized crime is what to do with all the cash. It is not uncommon for criminal organizations to form “front companies” that invest in interesting opportunities. They’re very good at hiding the real ownership. Legend has it that the Mafia started and owned the NY banks that gradually morphed into American Express. Be careful whose money you take!

1 Source: Wikipedia

- More about Angels Next Month -

- 30 -

For more information, please visit Dick's TNNW Bio.


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1 comment:

Beth Barany said...

Mr. Brown, You mentioned that "Most [wealthy individuals] expect a handsome ROI over a relatively short period of time." What period of time is that? Thank you.

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