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If your business is in need of funding, and you’ve maxed out your personal finances, exhausted your supply of friends and family and tapped the crowdfunding arena for all its worth, then it may be time to seek out an angel. Not the winged cherubic types, but rather the earth-bound variety of high net worth individuals known as angel investors.
Angel investors are rich folks. They typically invest their own money or family money in the early stage, even the idea stage in many cases. They also invest in fledgling companies in exchange for an ownership stake in the businesses. They provide a substantial amount of capital to early-stage businesses, with investments totaling $20.1 billion in 2010, spread across 61,900 entrepreneurial ventures. That works out to an average investment of about $325,000—although some angels make investments as small as $5,000—while others can invest millions or more in a single company, just to see it happen. That’s why they’re called angels.
But before you go rushing out to find an angel to answer your prayers, you need to ask yourself if you are suited to having angel investors as co-owners, and to assess whether your business would be attractive to them.
If you wind up accepting an angel investment you will need to give up an ownership stake in your company, and you’ll need to hear and heed advice from outsiders about the issues in your company. You’ll get advice that you may not always agree with. If these two dynamics appear to be a recipe for major conflict, then stop right here. However, keep in mind that personalities sometimes mesh and sometimes clash.
But if you are confident enough to know that your business could use the help of seasoned co-owners—many angels are former entrepreneurs themselves—and you value outside advice, then it’s worthwhile to understand what angels are looking for in an investment to determine if your business is an attractive opportunity for them.
Unlike friends and family and crowdfunders, who may make an investment in your business solely because they wish to see you succeed, angel investors have some pretty strict criteria that you need to meet. In addition to having a fully developed product and a verifiable customer base, you’re going to need to convince potential angels that your business is likely to grow rapidly in the medium term and that your revenues can reach upwards of $15 million.
Angels also want to see that you plan to put a strong experienced management team in place, and that you will service a large market where you can demonstrate advantages over your competitors. Having your own money invested in the company, as well as having friends and family onboard, is often a prerequisite.
While meeting all of the preceding criteria may help get you in the door, what you really need to hook an angel investor is an exit strategy. Angels don’t invest in companies because they want to help run them for the rest of their lives; they invest in them to make money and then move on to the next opportunity. Which means you’ll need to demonstrate a credible exit strategy that gets them out of the picture in five to eight years at a profit.
If you think that your company is at the stage where it makes sense to seek out angel investors then try searching for angel groups in your part of the country, as many angels prefer to invest in businesses that are located relatively nearby. A quick web search for angel investor groups in your area should get you started on the right path.
THE AUTHOR OF THIS BLOG ARTICLE IS NOT A LAWYER AND HARVARD BUSINESS SERVICES, INC. IS NOT A LAW FIRM. THE ARTICLE ABOVE IS NOT INTENDED AS LEGAL ADVICE AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. THIS SHORT ARTICLE IS STRICTLY TO MENTION SOME ASPECTS OF DELAWARE’S CORPORATION LAWS AND/OR LAWS RELATING TO OTHER FORMS OF ENTITIES WHICH YOU MAY NOT BE FAMILIAR WITH. WE RECOMMEND THAT YOU CONSULT WITH A LAWYER BEFORE FORMULATING A STRATEGY WHICH WILL BE SUITABLE FOR YOUR SPECIFIC CASE.