A Beginner’s Guide to Angel Investing

What is angel investing?

An angel investor is a private investor who provides capital for early stage companies at their seed or subsequent funding rounds. An angel investor acts alone or as part of a group, buying equity of the company (stock or convertible debt), after conducting due diligence, with an expected holding period of less than ten years. Typical investment minimums are $25,000 for individuals and $200,000 for groups.

An angel investor tries to minimize risks by investing in familiar industries close to home. An angel investor often has business experience relevant to the industry sector, thus can add value to the new venture with an active role. Angel investor participation may not be suitable for entrepreneurs who are averse to such active managerial involvement. With many investments, angel investors expect there to be a need for subsequent rounds of financing and thus look to the company to be convincing that by the time they need this new money they will have achieved sufficient results that such financing is feasible and desirable.

What are angel investing “demographics?

(Information from “Halo Report” published by the Angel Research Institute at www.angelresearchinstutite.org)

  • About 75% of deals are done in Angel’s home state
  • Medium pre-money valuation is $2.5 million
  • For 2013 Q3 there were reported 278 deals with total investment of $445 million, $1.6 million on average with a median of about $2 million.
  • 2013 Angel investments by geography

Region

% of Deals

% of Investment $

California

18.6

19.6

Great Lakes

11.8

13.0

Southeast

11.7

9.6

New England

11.3

14.2

New York

9.4

8.9

Mid Atlantic

9.2

10.8

Texas

8.5

6.3

Northwest

7.7

6.1

Southwest

6.0

5.5

Great Plains

5.5

6.0

  • Angel investments by industry

Industry

% of Deals

% of Investment $

Internet

38.5

34.4

Health Care

19.6

28.3

Mobile and Telecom

16.2

16.1

Other

13.2

6.4

Industrial

4.1

5.4

Software

4.0

4.3

Computer Hardware & Services

2.7

3.3

Energy & Utilities

1.8

1.9

What do Angel Investors look for?

Management team:

  • There is a team, not just founder
  • They have the technical experience of the product/service, industry experience, and have worked in/led a startup before. Ideally, started up and successfully exited a company
  • Founder is coachable, and if not of CEO caliber, is willing to step aside and hire one
  • Founder and any early investors are amenable to a sale or other exit in 3-7 years—it is not a life style operation; and there is a reasonable defined exit strategy.
  • Founder is prepared to trade 25-50% ownership for investment
  • Founder is prepared to spend 6 months raising funds in addition to starting and running the company
  • Founder along with family and friends have spent in the range of $50-125K to start the company
  • Team is focused on achieving the business plan. Lack of focus is the largest impediment to success.

Product:

  • There is a clear value proposition; the product must have some compelling, differentiating factor that the founder can explain clearly, simply and convincingly.
  • Favorable if the product is “disruptive” to exiting markets
  • At a minimum, product is in early state of testing with customers and initial feedback is good. Few angel investors will invest in a company that has not reached proof-of-concept stage, at least; and preferably even have some initial sales.
  • There are very few angel investors that will consider a brand new start-up with only an idea and a business plan.
  • There is a simple (short) approval process, if needed, like for medical devices and biomed; which translate to short time to market.
  • There are “broad and blocking” patents

Competitive Landscape:

  • There are some barriers to entry, such as IP
  • There are few competitors with similar technology at the same stage of development

 Market:

  • Sales can be scaled up to reach a national audience quickly
  • Market is large enough, at least in the $0.5-1.0 B range

Financials:

  • While some angel groups invest in companies with no revenues, it is more often the case that annual revenues are at least $500M.
  • Business plan is in excellent shape; helpful to have a 3-5 year financial model
  • Can demonstrate that annual revenues can reach about $10MM in 3-7 years.
  • The business plan must show a timeline of development of the company, with objectives, and clearly lay out how the investors' money is going to be spent in achieving those objectives.
  • Typical sums raised in an angel round are $500K to $1.5 million.  To raise this amount usually requires several individual investors and/or angel groups.
  • Almost without exception, angel investors will look at the sales forecast of the company and divide the number by 2.  This is because they believe that most entrepreneurs are congenitally optimistic.  They will base their analysis of the financials on these reduced sales forecasts.
  • Angels typically look for financial plan evidence that can receive 5-10 times the original investment in 5-10 years; actuals are more like 5 times in 7 years for the winners.

How to connect to Angel Investors:

  • While most angel groups have a web site and suggest that the entrepreneur can just submit their information, this approach is not recommended. Find someone who knows a member of the angel group, or the individual angel, and with this personal introduction/reference pitch the deal to them and have them bring it to their group
  • The presentation to the investors must be brief and to the point (a two page executive summary and a 10-12 page Power Point presentation), including all the factors mentioned above.  It should be no more than 15 minutes and must include on one chart what the deal terms; pre-money valuation, percentage ownership for the investment sought, a convertible loan or straight out investment, name of the deal lead, etc.
  • Long business plans are rarely read.

Where to learn more about Angel investing:

  • Angel Capital Association: www.angelcapitalassociation.org provides FAQs about angel investing and links to angel groups. Its “Halo Report” details angel investment activity and trends including by industry and geography the number of deals, size of deals and valuations.
  • Google “angel investors in Washington DC” for links to many local groups
  • To get an idea of how angels evaluate company proposals, the Kauffman Foundation has a valuation worksheet: http://mnan.org/valuation-worksheet.pdf.

Is there another way to get angel equity funding?

There is a new market called “angel list” (www.angellist.com) which bills itself as the place where startups meet investors. There is a good FAQ section where entrepreneurs can learn more about this program.

About the Author

Hal Shelton, SCORE Mentor and Board Member

Hal Shelton had a successful career in the energy industry. First at Sunoco, Inc including a four-year assignment in London. Then with USEC Inc. (NYSE listed), a global alternative energy company, where he was Senior VP & Chief Financial Officer and quarterbacked its privatization, the largest for a US Government entity, via an IPO. Hal also was a board member and audit committee chair for a NASDAQ listed technology company and was a Board member and CFO/Treasurer of Mercy Health Clinic, a volunteer non-profit safety net providing free medical care and medicines to low-income, uninsured adults in Montgomery County, MD. Hal currently serves as a board member (vice chair and formerlyTreasurer) for the SCORE Association and SCORE Foundation, nonprofits providing education and training to entrepreneurs and small business owners so they can be successful. In addition, Hal is currently an investor in early-stage companies. Read more about this mentor.

 

Fred Glave has over 40 years experience in the telecommunications industry. Beginning in the research and development area, he successively moved through positions in engineering, marketing, general management and senior officer positions with Nortel Networks. He founded a new venture-financed company in Silicon Valley and went on from there as a senior executive and CEO in several telecommunications enterprises. He has had extensive experience in international marketing and been the lead initiator in several technology and corporate acquisitions or partnerships. Mr. Glave’s strengths lie in all phases of technology management, and he is knowledgeable at the working level with all aspects of telecommunication management. He is a graduate of the University of Toronto in Electrical Engineering and holds a Masters degree from MIT and a PhD from Univ. of Calif., Berkeley, all in electrical engineering. Since retiring from his last position in 2002 he has been active as a counselor with SCORE (Service Corps of Retired Executives), where he served as District Director for the Metropolitan DC District, 2008-2010. Read more about this mentor.