HOW TO USE ANGELS WHEN YOUR BUSINESS NEEDS MONEY

By Barbara Weltman May 12, 2005
Barbara Weltman When a small business wants to expand, it can seek a loan from a bank or other third party. This borrowing, however, is a monthly drain on cash flow and can impede plans for growth. An alternative to borrowing is to bring in money from cash-rich new investors. While only a very few small businesses can attract venture capitalists – investors who seek dramatic returns (40% to 60% annually) – most small businesses seeking additional capital can find help by looking for an angel.

What are angels?
In the theater, “angels” are non-theater people such as tycoons who help to finance a play. In business, angels do the same thing – provide capital. Typically, angels are private investors (individuals or businesses) seeking to invest between $50,000 and $2 million (some may provide loans).

The Small Business Administration has estimated that there are about a quarter of a million angels currently active in the U.S., providing funds for about 30,000 small businesses each year. Angels’ total investments are probably between $20 billion and $50 billion, compared with a mere $3 to $5 billion in venture capital.

The Center for Venture Research at the University of New Hampshire (http://wsbe.unh.edu/cvr) has created this angel profile:

  • The angel is 47 years old, with an annual income of $90,000 and a net worth of $750,000. He or she has a college education and has been self-employed.

  • Seven of 10 investments are made within 50 miles of the angel’s home.

  • Angels are seeking an average annual return of 26%, although they acknowledge that about one third of their investments will result in losses.

  • Nine of 10 investments are made in start-up companies with fewer than 20 employees.

    Finding angels
    You can’t simply look up “angels” in the Yellow Pages. You can do a search on the Web, but this may not necessarily turn up angels interested in your type of business and in your location. Here are some key resources for finding angels.

    Active Capital (www.activecapital.org), established in 1995, was formerly known as the Small Business Administration’s Angel Capital Electronic Network (ACE-Net). This new site was launched in December 2004. It is the premier Web site for entrepreneurs seeking private investment capital (up to $5 million per year). Eligible small businesses can be listed here and angels will find them. Caution: In accordance with SEC rules, only corporations can be listed; sole proprietorships, limited liability companies and partnerships must look elsewhere for angels.

    Network of Business Angels & Investors (www.nbai.net), is a small network of angels that has been active for more than 10 years. It offers a free capital consultation.

    Angel Capital Association (www.angelcapitalassociation.org) is the professional alliance of angel groups, such as those listed above. Here you can link to directories of angels by region and city.

    Giving and getting
    What are angels looking for when making investments and what do you have to give up in order to secure their financing? There are no hard-and-fast rules, but here are some guidelines to keep in mind in negotiating with angel investors.

  • Return on investment. Because angels expect to earn more than they could by more conventional (safer) investments, they typically want to receive five times their original investment within the first five years. Some angels focus on sales growth; others on internal rate of return (a present value of future cash flow plus market value of an investment).

  • Stake in the company. Angels usually want a stake in the business, although some are more active than others. Typically, they want 5% to 25% of the ownership of the company. They also want a position on the company’s board.

  • Other demands. Angels may want to say in certain actions that the company might take, such as selling substantial assets and giving stock to management. They also may ask for the option to participate in a second round of financing.

    Because your relationship with an angel may last for years, take the time to fully understand the roles that each of you will play. Determine what expertise the angel brings to the relationship. Also, if you are bringing in more than one angel, make sure that they can coexist peacefully.

    Copyright © 2005 by BWideas.com, Inc.

    Category: Management Fundamentals
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