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Angel Investors

Robin Robin Cross Cross

March 13, 2009

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Finding the right angel investor could help you get your start-up off the ground. Angel-investor networks are a good place to start looking for funding. These national and local groups of angels meet -- formally or informally -- to discuss deals and learn about the best new business opportunities.

Each network works in a slightly different way: Some may charge fees for making presentations and some may charge a fee to apply for consideration. Some even require an “official” introduction to the group by an angel member while others solicit ideas via a web site.

The credit crunch and economic downturn have some angels feeling skittish. But others see opportunity:

Studies show that the best time to start a business is when the economy is down. That's because entrepreneurs with good ideas will find cheaper land, labor, supplier contracts, and other ingredients that go into starting a business. Angels that back such ventures can earn impressive long-term returns—one study cites a rate of return of about 27%, on average, or 2.6 times the investment in 3.5 years. The risks, of course, are steep. Still, 258,200 angels pumped $26 billion into 57,120 ventures last year, according to the University of New Hampshire's Center for Venture Research.

Any angel will tell you there's a significant learning curve. But a big transformation in angel investing is making it easier to move up that curve: the rise of more formal angel investor networks. It wasn't all that long ago that angel investors largely hooked up with entrepreneurs through ad-hoc social networks, friendships created over the years, perhaps at the country club, or local philanthropic events. Since the latter part of the 1990’s there has been a proliferation of more professionally organized groups, usually with Web sites, that screen investments and pool money on a local and regional level. Estimates of the number of angel investment groups in the U.S. and Canada go as high as 275. Numbers of individual angel investors are much greater.  The groups even have their own trade-and-education association in Washington, the Angel Capital Assn.

While many angels are current or former entrepreneurs, and that background can prove invaluable, they also need to develop investing skills. The successful angel investor adheres to the same disciplines that make for a good investor, from Berkshire Hathaway's Warren Buffett, to Yale University's David Swensen. Understand the risks. Follow an intellectual framework. Have a well-thought-out methodology for buying and selling. Do due diligence. Diversify.

Experienced angels recommend that investors create a diverse portfolio as protection against inevitable failures. After all, the companies they invest in are ones with little cash flow and no operating history. Angels rightly tend to focus their efforts in an industry they know.  But to get a wider range of perspectives and deals, and to pool resources, many angels join angel investor networks.

The level of professionalism within angel investor groups is all over the map. Some mimic professional venture funds, a number have forged close ties to universities, and others are more like social clubs engaged in for-profit philanthropy. A common mantra among angel investors and angel investment networks or groups is the importance of due diligence. That means pursuing questions like: What is the market opportunity for this business, what barriers to entry does this business have, and what is their specific business model? What is This companies competitive edge? Do they have an exit strategy? What is the entrepreneur's background?

What sort of return can an angel investor or angel investor network expect? There's that rate of return of about 27%, on average.  Of course, averages can be a bit misleading. Remember, on average Lake Erie never freezes. 

When a business owner is looking to angel investors to raise capital, it is a great starting place to think of your business from an angel investor’s point of view.  Ask yourself the questions that the angels will ask.  Come up with clean, specific answers.  Learn those answers so you can rattle them off easily to anyone you meet.  You never know where you may find an angel to help you raise capital.  Revamp your business model a bit if needed, so it WORKS on paper as well as in your head, because, the angel investors will want to see the written business plan and how they will make their investment back.  One of the resources to learn how to put all this information together is Raising Capital Secrets, which I have been using as well to fund projects.  No matter what resources you use to raise capital for your business, do your due diligence as well.

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