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.
  • Some 2013 Angel investments by geography:
    • California: 18.6% of deals and 19.6% of investment dollars
    • Great Lakes: 11.8% of deals and 13% of investment dollars
    • Southeast: 11/7% of deals and 9.6% of investment dollars
  • Some Angel investments by industry
    • Internet: 38.5% of deals
    • Health care: 19.6% of deals
    • Mobile and Telecome 16.2% of deals

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(s)

Hal Shelton

Hal Shelton is a SCORE mentor who is passionate about helping small businesses start and grow. He has been a CFO and board member for NYSE/NASDAQ publicly traded companies and nonprofits.

SCORE mentor, author and angel investor
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