ABC of Angel Funding

What are Angel Investors?• an angel investor is NOT an investor with golden wings and a halo but rather an individual who provides startup capital to a new business and expects a percentage of ownership equity in return.• a financier who provides equity capital for startup companies and growing firms.

How Angel Investors differ from Venture Capitalists?

• venture capitalists, on the other hand, are quite different from angel investors. Rather than using their own funds, VC's invest pooled money from other people. • in addition to the percentage of equity interest in a company, venture capitalists usually desire an active say in the invested company's business decisions. • venture capitalists also have the tendency to invest in expanding companies, although many VC firms have begun to invest in early stage businesses as well.

The benefit of obtaining Angel Capital?• many lending institutions are very hesitant about early stage ventures; therefore, it can be very difficult to obtain the necessary startup capital for a new business. If a prospective entrepreneur is unsuccessful in borrowing money from a bank, s/he may often resort to an angel investor to raise capital. • the average angel investor can invest anywhere between $150,000 and $1.5 million in a given venture.

The Angel investors' return on investment?

• due to the risks associated with investing in a new company, an angel investor will often expect a very high return on investment (ROI). • since it is a proven fact that many new companies will fail, an angel investor will expect a return up to ten times his/her investment within several years. Angel investors believe that this amount will balance the large risk of losing their invested money.

The entrepreneur and angel investor relationship?

• it is vital for a company and their angel investor(s) to form a sound relationship with one another before any investment takes place in order to make sure they share the same goals and ideals. • a company and their angel investor(s) must feel comfortable with one another in order to maintain good lines of communication and to ensure a successful business.

Different types of Angel Investors?• corporate angels• entrepreneurial angels• enthusiast angels• professional angels • head angels (aka “lead dogs”)• mentor angels (aka “guardian angels”)• generational angels (aka “silver spoons with silver wings”)• intentional angels (aka “dark angels”)• typical angels (aka “arch angels”)• inexperienced angels (aka “cherubs”)• venture capitalists who are also angel investors (“moonlight as angels”)• non-company building angels (aka “technology angels”)

Critical aspects of an Angel Investor?1. An angel investor’s value to the

startup• most angel investors take an active role in their invested company; therefore, entrepreneurs should expect to enthusiastically engage with them on a regular basis. • an experienced angel investor will regularly mentor and consult new entrepreneurs on how to move the company forward and will often request a board seat to make sure their invested company is on the right track to success.

Critical aspects of an Angel Investor?2. Background and Perspectives

• since every angel investor’s business perspective is highly influenced according to his/her personal experiences, they may perceive things differently from other angel investors. • in addition, they may have more knowledge than others depending on their industry of expertise. Regardless of the situation, it is important for entrepreneurs to fully understand their angel investor’s background, industry experience, personality, and ROI before signing the term sheet. • at times, angel investors can either make or break a company

Critical aspects of an Angel Investor?3. Differences in expectations

• entrepreneurs have certain expectations on how their startups should be managed and operated. • however, many angel investors may view an entrepreneur’s standards as “naive” and disagree with how the new business owner should take the company forward. • these differences of expectations between both parties will often lead to poor communication, avoidance, and resentment.• both the angel investor and entrepreneur must understand the expectations of one another in order to amicably run the new company.

Critical aspects of an Angel Investor?4. Risk of Investment and Patience

• each investment they are involved in is considered “high risk” since they do not have many investments that can protect them if one of their startups fails.• angel investors can also react differently under pressure, which can be very influential in a company’s success. • for example, if an angel investor fails in one investment, they may accept their failure and move on. Others may lose their patience, react illogically, and may choose to meticulously micromanage the affairs of the failed startup. • as a result of the latter situation, the entrepreneurs may be advised to make the wrong strategic moves. • due to the fact that every angel investor’s personality and reaction is different, entrepreneurs should therefore understand how risk averse the angel investors are before obtaining startup capital from them.

Critical aspects of an Angel Investor?5. Professional Management of the Company

• unlike the conservative method of investing that banks and venture capitalists have, angel investors tend to communicate with entrepreneurs on a more informal and personal level. • at times, this relaxed approach can lead to miscommunication and misunderstandings between the angel investor and entrepreneur. • some angel investors may have the tendency to micromanage their invested company’s affairs and undermine the entrepreneur’s efforts in operating the company, which can be very damaging in the long run.• to avoid such differences in opinions and possible falling out, it is important that the entrepreneurs understand the managerial background of their angel investors from their previous investments before signing the term sheet.

Critical aspects of an Angel Investor?6. Ethics

• ethics are very important in any business endeavor. The angel investor should have ethical behavior in all of their business pursuits since the process of raising capital is similar to having a business partner. • entrepreneurs should scrutinize the angel investor thoroughly, especially when it comes to the ethics of how they conduct business practices before any investment agreement is made.

Angel investors and Equity Financing• often times, when a prospective entrepreneur exhausts all of their immediate funding sources (personal savings, borrowed money from friends and family, and bank loans), they turn to angel investors to raise capital. • angel investors will provide the amount of needed funding to the entrepreneur in return for equity capital. • this means that the new business will be funded in exchange for ownership interest in a company. • this interest usually comes in the form of stocks or some other form of ownership that converts to stock. • unlike traditional debt financing that requires immediate payment over time, equity financing does not involve repayment of the borrowed money since angel investors desire equity ownership stake.

Angel investors and their exit strategy

• before investing in a business, an angel investor will expect an exit plan, the agreeable strategy by which they will cease their ownership in a company. • this can come in the form of an acquisition, initial public offering, earn-out, merger, or debt-equity swap. • angel investors who hold equity ownership in a company will often prefer to sell their shares in an IPO (or initial public offering), while others may prefer the sale or merger of the company.

Angel investors and Experience• when angel investors invest in a company, they usually request a seat on the Board of Directors and/or take an active management role in running the company. • this can be perceived as both good and bad. It is good in the sense that often times experienced angel investors will provide valuable insight to the entrepreneur, mentoring them throughout the venture in order to ensure the invested company’s success. • however, there is a downside to giving up a certain percentage of ownership to an angel investor. • the more ownership that the entrepreneur gives up, the more overall control they lose.

Angel investor capital requirements• in order for an entrepreneur to obtain startup capital from an angel investor, they will need to devise a well-written business plan, present accurate cash flow projections, the financial history, and personal and business credit profiles.• some angel investors may request the latest tax return information and bank statements from the past three years. • it is necessary to present a well-detailed business plan and have confidence in the plan so that you can convince the lender that you are a low-risk investment when obtaining startup capital. • if the entrepreneur appears confident and has good business sense, then they will most likely have no problem in finding their desired startup capital for their business.

Questions That Angel Investors Will Ask An Entrepreneur?1. Tell us about yourself and your

company?• the entrepreneur should give a brief introduction about him/herself, including credentials and education, and other pertinent background information in their opening. • a general idea of the company should then be mentioned, followed by the company objectives, as well as the different products and services offered.

Questions That Angel Investors Will Ask An Entrepreneur?2. Who are your major

competitors, and what makes your products and services unique?• entrepreneurs should be prepared to mention any market opposition and how their products and services will give the business the competitive edge. • since market competition can be relentless, it is always a good idea to provide solid examples.

Questions That Angel Investors Will Ask An Entrepreneur?3. Who are your targeted customers, and how

have they responded to your prototype? • angel investors are always curious of demographical information, including the targeted market and consumer base the new business will appeal to. • by creating a prototype of the business idea(s) and welcoming consumer response, the entrepreneur can further refine his/her prototype according to customer feedback. • it may take multiple revisions before an actual product is mass produced; therefore, it will be wise for the entrepreneur to recruit potential customers to support his/her sales and even use them as references to encourage their deal with angel investors.

Questions That Angel Investors Will Ask An Entrepreneur?4. What is your marketing strategy for your

products and services? • this includes an entrepreneur’s approach in promoting the business through advertisements, internet marketing and promotions, and public relations to increase sales and achieve a competitive advantage. • marketing can be quite costly, so it is extremely important for the entrepreneur to include this estimated price in the financial plan.

Questions That Angel Investors Will Ask An Entrepreneur?5. How much angel capital are you

seeking, and how will this investment amount be distributed? • it is always a good idea for entrepreneurs to provide an estimate of the amount of angel capital they are seeking for their startup. • by presenting the angel investor group with financial outlines and predictions, the entrepreneur will gain credibility in conducting their own due diligence (financial research) for their company. • more impressive is the rough draft or summary of how the angel investor capital will be dispersed (i.e. rent, utilities, technologies, salaries, etc.)

Questions That Angel Investors Will Ask An Entrepreneur?6. What time frame do you expect the invested

money to last? • this basically refers to the hypothetical period of time it may take for the anticipated cash flow to appear. • this is also the calculated schedule of time that is considered to be the “safe period” before additional capital may be needed. • typically, it will take an average of one year or more for any new business to see revenue; therefore, it is important for the entrepreneur to consider all possible expenses before determining this amount.

Questions That Angel Investors Will Ask An Entrepreneur?7. What is my stake in the company and my

ROI? • since every prospective angel investor wants to have an idea of their percentage stake in a company, as well as their rate of return, it is crucial that this figure be presented and negotiated. • often times, angel investors expect a certain percentage of ownership in a company with a large return on investment because of the risk associated with the fate of new businesses. • the entrepreneur should be aware of such demands and be prepared to present such values.

Questions That Angel Investors Will Ask An Entrepreneur?8. What will happen next if the company fails?

• angel investors are known for their risky business deals and often have a well-planned exit strategy for each of their investments. • there is always the possibility their invested company may not be as successful as anticipated; therefore, they usually prepare a strategic plan in their agreement. • they may choose to exit the company after a certain period of time through IPO, merger, acquisition, or sell-out. • the entrepreneur can even offer their angel investor some protection by providing a secured position on assets and subordinating the equity in case future liquidation occurs.

Essential Components That Appeal To Angel Investors?1. Geography

• most angels prefer to invest locally for a variety of reasons. • first, the convenience of proximity will allow them to frequently visit the companies they have invested in, so they can regularly convene with the management team and be present to witness their investment progress. • second, being closer to their investment enables them to “source” deals through referrals whom they know and trust. • in order to accomplish this, they rely greatly on other locally situated angels, accountants, attorneys, business associates, etc.

Essential Components That Appeal To Angel Investors?2. Size of the investment

• angels are interested in building small start-up companies into moderately-sized businesses or large valuable corporations with a high ROI. • these types of start-ups may require capital of tens of thousands of dollars minimum to launch, with subsequent rounds of investments throughout the company’s development. • angels tend to invest anywhere from $25,000 to $500,000 or more.• for example, a $500,000 total investment a start-up requires could be made by one angel investor, 5 angel investors who contribute $100,000 each, or 20 angel investors who contribute $25,000 each to the business endeavor.

Essential Components That Appeal To Angel Investors?3. Management team

• the management team appointed by the company’s founders must be solid, balanced, and experienced. Some businesses have management teams located in different cities and come together solely through telecommunications or videoconferencing. • this kind of “scheduled” organization puts the whole team at a disadvantage because they are not physically working together or know how to properly collaborate in the business.• on the other hand, if all the individuals of a management team are situated in one location, the individuals have the opportunity to work with each other and learn from each others’ strengths and weaknesses. • even if a team has never worked with each other in the past, when they come together during the start of a company, they should demonstrate the “ability to execute,” that is, work together in harmony with a proven track record and show their company is establishing revenue and a quick ROI.

Essential Components That Appeal To Angel Investors?4. Market/industry influence

• angel investors usually invest in industries they have experience in. • in addition, they always evaluate the market’s needs for different products or services. • the industry of the young company’s goods and inventions should already demonstrate vast growth potential before an angel investor will consider providing the necessary funds. • a growing market is the key to profitability and is indicative of an angel investor’s strategy. • early-stage companies should always provide goods and services that reflect uniqueness, a competitive edge, and consumer needs in a growing market.

Essential Components That Appeal To Angel Investors?5. Improving technology

• technology products and services have always demonstrated popularity among consumers. • since many technologies exist, the entrepreneur should convince the angel investor that their particular technologies are not only one-of-a-kind, but that they address any flaws that their competitor’s products may have and as a result consumers will purchase their products and services.• many technical people employed by large corporations are able to witness numerous market niches their companies have ignored. • these people then move on, leaving the company, and develop a technology that addresses the previous problems encountered. • angels like to invest in companies like this because there is already a proven consumer base and an identifiable customer need that gave rise to the entrepreneur’s novel approach.

Essential Components That Appeal To Angel Investors?1. Improving technology

• technology products and services have always demonstrated popularity among consumers. • since many technologies exist, the entrepreneur should convince the angel investor that their particular technologies are not only one-of-a-kind, but that they address any flaws that their competitor’s products may have and as a result consumers will purchase their products and services.• many technical people employed by large corporations are able to witness numerous market niches their companies have ignored. • these people then move on, leaving the company, and develop a technology that addresses the previous problems encountered. • angels like to invest in companies like this because there is already a proven consumer base and an identifiable customer need that gave rise to the entrepreneur’s novel approach.

Essential Components That Appeal To Angel Investors?6. Potential rate of return

• when compared to venture capitalists, monetary gain tends to be a secondary motive for most angel investors. While many angels invest for reasons that are not purely financial, their overall goal is still profitability. • they recognize that start-up companies are high-risk investments and will want to justify that risk by seeking commensurate (very high) rate of returns.• for example, some angels require a 25% rate of return each year, while others may desire much more, such as ten times their investment in a specific time frame. This given period of time may span from a couple of years to several years. • many of these angel investors do not expect a rate of return for at least 5-7 years. Their average return on investments expected is about 34%. their company meets the potential investors’ preferences.

Essential Components That Appeal To Angel Investors?7. Exit strategies

• this is a company’s approach for providing investors with a liquidity event, an occasion or time during the company’s development at which the investor can obtain their rate of return. • the exit strategy is often included in the entrepreneur’s presentation, which should provide the best estimate of time for exit and liquidity for all potential investors. • acquisition of a company or a company merger is the most probable exit strategy made unless the company revenues and market sector strongly suggests an IPO opportunity.