Angel Financing: Making it Work for Your Company

by | Small Business Financing, Small Business Funding

There’s no intent to discourage here – and you probably knew this already – but raising money for your start-up or early-stage company can be harder than actually running and growing your business.

Funds are always scarce…there’s always someone in the room more than willing to tell you why your plan just won’t work…and even would-be investors who show serious interest in your company always have much safer places to put their money.

But enough with the negativity.

Assuming you’re completely committed to growing your business and that you’re getting encouraging feedback from the marketplace (in other words, someone’s buying whatever it is you’re selling), there are lots of ways to skin the cat. And if you’re caught halfway between your personal boot-strapped resources and attracting serious capital injections from private equity or private placement action, then “angel financing” might be a logical move.

What is Angel Financing?

The term “angel financing”originated in the mid-1900s, as a way to identify people who had helped finance Broadway productions.

Angel financing is acquired from individuals (angels) who put their own money into a company, usually in exchange for a share of ownership in the business, or debt that can be converted to equity sometime in the future. Angel investments tend to run from about $50 thousand at the low end, to up around $2 million.

Most angel investments are still made by individuals (or the trusts or other legal entities they control). The arrangement evolved in part because the relatively small amounts of funding needed (less than $2 million) for companies at this stage and scale – and the eventual return – could not justify the evaluation and due diligence needed to attract the interest of a larger venture firm.

But interestingly, there is a growing movement toward angel investment groups, or partnerships, where like-minded angel investors pool their capital to make larger financial commitments to companies of interest. Based on information from the Angel Resource Institute, angel investors have recently gravitated toward start-ups involving Internet applications, healthcare, telecom, and energy and utilities.

Angel investing is attractive for young companies because:

  • Angel investors tend to be patient in terms of their time horizons for return on investment, often expecting and tolerating a holding period of eight or even ten years. (Traditional institutional investors normally want to see a return in three to five years.)
  • An angel investor arrangement allows you and your company to off-load some risk, which can help preserve your personal assets and credit profile.
  • Angel investors often have direct experience in the kinds of business they like to help. Retired CEOs and entrepreneurs are often found in the angel investor role. This puts them in a position to provide your company valuable contacts for sales   leads, staffing, long-term growth planning, and even additional investors.

How to Find Angel Financing

In spite of recent efforts to formalize the angel investor community through various organizations and associations, the process still tends to boil down to effective networking and relationship building.

When starting your search, consider these resources:

  • Financial experts. Your accountant, your investment broker, your attorney, and your traditional banker should all be very familiar with your business and its potential. These individuals can also provide introductions to potential investors, even if they haven’t previously provided funding, or even heard the term “angel investor.” You will almost always have better luck if your contact can arrange a meeting with a potential investor, than if you called on your own.

Tip: Many retired executives enjoy the angel role not only for the potential financial rewards, but also for the chance to stay involved and relevant in their industries, even on a limited basis. Mention this when you’re approaching your contacts for potential leads.

  • Business Incubators. Business incubators, which are often attached to universities, foundations, and other not-for-profits, can provide outstanding contacts and access to possible investors. But, fair warning, most of the companies attached to the incubator will be in financial circumstances similar to yours. But, ultimately, your involvement with a reputable business incubator will be viewed as a positive by your investors.
  • Venture Capital Firms. Your company likely isn’t ready for structured venture financing, but you can call venture firms that  have worked with larger companies in your industry and ask them if they know of angel investors looking for opportunities in your sector. You might get lucky with a great referral and as a bonus, establish a contact at the venture firm for when you need it later on.
  • Angel Networks. Angel investor organizations, including the Virginia-based Angel Capital Association, can be great resources for growing companies. Angel networks are categorized by geography and industry focus. In addition to contacts, you’ll find information on preparing business plans and investment agreements, assembling a credible management team, and making effective investor presentations.

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