Raising Angel Capital

[BusinessAdviser]

Interesting article on raising angel capital, courtesy of Entrepreneur.com:

Garnering Angels
Sure, you may have ventured for VC, but raising angel capital takes a different kind of skill.

By Guy Kawasaki | Entrepreneur Magazine - January 2008

Make no mistake about it, there's an art to raising angel capital. It's not harder or easier than raising venture capital--it's simply different. Here's how:

1. Make sure the investors are accredited. Accredited is legalese for "rich enough to never get back a penny." You can get into trouble for selling stock to the proverbial little old lady in Florida, so don't. And get a good corporate finance attorney (as opposed to your aunt, the divorce lawyer) to advise you about the process of seeking investments.

2. Make sure they're sophisticated investors. Sophisticated angel investors have knowledge and expertise in your industry--they'll have "been there and done that." Sure, you want angels' money, but you also want their expertise. If you want to raise venture capital in later rounds, it will be much harder if you show up with a long list of unsophisticated investors.

3. Don't underestimate them. If I had a nickel for every time an entrepreneur told me she was going to raise angel capital because it was easier than raising venture capital, I wouldn't have to run ads in my blog. When approaching angels, do all the same things you would do when approaching venture capitalists. The days of angel investors as easy marks are gone forever--if they ever existed. And angels care as much about liquidity as venture capitalists do--maybe even more because they're investing their personal, after-tax money.

4. Understand their motivation. Angel investors differ from venture capitalists because typically, angel investors have a double bottom line. They've made it, so they want to pay back society by helping the next generation of entrepreneurs. Thus, they're often willing to invest in less proven, riskier deals to help entrepreneurs get to the next stage. I know many nice venture capitalists, but I don't know that any of them are motivated by the desire to pay back society.

5. Enable them to live vicariously. One of the rewards of angel investing is the ability to live vicariously through an entrepreneur's efforts. Angels want to relive the thrills of entrepreneurship while avoiding the firing line. They enjoy helping you, so seek their guidance frequently. By contrast, most venture capitalists only want to get involved when things are going really well or really poorly.

6. Make your story comprehensible to the angel's spouse. The usual membership of an angel's "decision-making committee" consists of one person: a spouse. So, if you've got a "client-server open source OPML carrier class enterprise software" product, you must make it comprehendible to the angel's husband when he asks, "What are we investing $100,000 in?"

7. Sign up people the angel has heard of. Angel investors are also motivated by the social aspect of investing with buddies in startups run by bright people who are changing the world. Even if the other investors aren't buddies, investing side by side with well-known angels is quite attractive. If you get one of these guys or gals, you're likely to attract a whole flock of other angels, too.

8. Be nice. More often than venture capitalists, angel investors fall in love with entrepreneurs. The entrepreneurs may remind the investors of their sons or daughters, or even fill the position of the sons or daughters they never had. Venture capitalists will sometimes invest in a schmuck as long as that schmuck is a proven moneymaker. If you're seeking angel capital, then you're probably not a proven moneymaker, so you can't get away with acting like a schmuck. Be nice until you are proven--although I hope that even when you are proven, you'll still be a mensch.

[rogercbryan]

Great Info! Lets just hope people read it and then apply it!

[Rani13]

Thanks for this info. My mother-in-law preaches about the benefits of Angel Capitalists, but this article really broke it down very well for me. I think this might be the kick start I need.

[BusinessAdviser]

Thanks for this info. My mother-in-law preaches about the benefits of Angel Capitalists, but this article really broke it down very well for me. I think this might be the kick start I need.

You're welcome. There is a BIG difference between venture capital and angel capital, but it seemed as though many users here were unfamiliar with the differences between the two. Good luck, and keep us posted.

[jandmsolution]

That is completely true here. I just read a new type of investor in Portfolio in this month's edition. Let me see if I can scan it in for everyone to read.

[paul2145r]

I have come across a large segment of International investors that are interested in potentially investing in American businesses. This is a different breed of investor, however. They play along a different set of rules, however. They are more interested in the bottom line than by any "desire to pay back society".

Many have limited english, so we have begun to offer Business Plan translation services to ease the transition of moving into a new region, market, and/or culture.

I think that the next couple of years will be rather interesting. This past year, a number of major investment funds have taken on investors from "unmentioned foreign nations".
Domestic corporations have shifted to international markets. Whether we like it or not, it has become a global marketplace.

2008 will be the year to diversify. There is change in the air; and it is not just stemming from the '08 elections!

[Cole Taylor]

Just for clarification, the term "accredited" is pretty easy and being as important as it is, it should be defined. Simply put, it is an individual with a net worth in excess of one million or an annual income in excess of $200,000 for the last two years with the expectation of the same in the current year, or an annual income of $300,000+ jointly with spouse.

Investment groups, trusts, corporations, etc. all have different definitions which you can find on the SEC website.

The reason you want to deal with accredited investors only, even though many of your exemptions from registration allow you sell to a certain number of non-accredited investors, is because accredited investors meet the sophistication criteria and have little to no recourse in the event that the investment goes south. Of course this assumes that everything was done legally and in compliance and no fraud or misrepresentation was made.

The term sophistication varies from state to state and should not be relied upon in determining whether or not to take on an investor. For instance, here in California, "sophistication" does not have an agreed upon meaning. Both the State and Fed use the term sophisticated and I don’t believe the article is intending to use the term in qualifying an investor, but when you're dealing with investors you can always depend on "accredited" which is clearly defined.

Also, keep in mind that the article is talking about individual angels which are becoming harder and harder to find. Many have joined forces to form angel groups which have comparable investment criteria to that of the VC.

...Time to head to Veags for some hookers and blow before CES 2008!

[BusinessAdviser]

Great observation, Cole. In fact, this raises an entirely different issue, one about which most members here are unaware. There are numerous federal and state laws which restrict your activities in seeking investors. Everyone looking should make sure they are aware of these laws. Thanks for raising this issue, Cole.