Angel Investing - How Can It Work For You?

Individuals known as angel investors have been a mainstay in US business for decades. While the term may have first been used to describe financial backers of Broadway shows, angels have been investing in - and advising - all types of companies in every conceivable industry. What makes an "angel" and how can they help your business?

Investor Characteristics

In the generally accepted sense, angel investors are individuals, not institutions. They have the financial capability and are usually able and willing to invest two key ingredients into a company's growth plan: capital and time. In terms of angel investment, expect less in the way of capital and more in the way of experience. Accordingly, angels are usually not passive financial investors. They are usually experienced in your company's field or industry and have a lot more to offer than simply capital. Like an experienced specialist venture firm, angel investors fall under the category of "smart money", but with a much more hands-on role than that played by institutions.

Circumstances - When & From Where Will Angel Investors Surface?

Most typically, entrepreneurial companies will encounter angel investors in the early stages of their development, but it is not unheard of to see them being involved in latter-stage firms as well. Generally speaking, in the early stage companies, angel investors are "impact players", strengthening a key area in the company's development. In latter-stage ventures, angel investors are also impact players, but they can also be in a "fix it" role for these more developed companies whose business plan may need shoring up.

Many times, angel investors work within a network of professionals and advisors. They are often referred by lawyers, accountants, search executives and investment bankers. Frequently, institutional funds will introduce an angel investor as part of a capital round or prior to an investment round. Again, the goal is the same as yours: maximize the chances for success and minimize the risk of failure.

What Are Angel Investors Looking For?

Most angel investors are looking for investment opportunities where they can take advantage of their past business experiences and contact network. And this is exactly the kind of access and leverage most entrepreneurs should be seeking. It is far more productinve to open doors with a single phone call from a well-regarded industry veteran than to spend weeks and months trying to find the door!

Angel investors usually limit their investments to businesses in industries they know well and to those with identifiable product lines at or beyond the beta stage. Because they know an industry and its market size particularly well, many angels will be looking for your company's proprietary edge, be it in the form of patents or some other intellectual property that raises a significant barrier to competition. Finally, many angel investors look at opportunities within clearly defined geographic regions.

TIP: Consider the amount of capital invested by angel investors more as a personal commitment than as a sole source for growth equity. Combine their expertise and capital with that of an institution to give you both the talent and the total capital you will need to execute your growth plan.

Due Diligence

As with any other investment "dance", we recommend that you do your homework before entering into a relationship. Because angels expect to be actively involved in your company's affairs, maybe even day-to-day, make sure the chemistry works. Spend plenty of time with any prospective angel(s) to make sure that he or she will fit into your corporate environment. One of the key questions you will have is: "Does this investor have an entrepreneurial background?" The flip side from the investor will be: "Does this management team have the capability to run a growth company?" Good fit plus smart money equals great chances for success. 

TIP: Before launching into your new relationship with an angel investor, make sure that you have a written agreement as to your mutual expectations. It will help define the roles and commitments of each party and avoid, or at least minimize, operating tensions which can occur.

Finding Angel Investors

There are a number of defined networks of angel investors. Perhaps the oldest, ACEnet is still a viable source for locating potential investors. New Vantage Group (The Dinner Club and others) is another source in the Washington, D.C. area. We favor Angel Investor News as a top network for locating both potential investors and entrepreneurial opportunities. Don't forget your local banks, Chamber of Commerce, accounting firms, business incubators and other such resources. You never know when you will find an angel on your shoulder.