Do you believe in angels? If you thought finance had nothing to do with angels, think again.
These high-net-worth individuals, largely unfazed by the downturn in the housing market and signs of weakness in the U.S. economy, are still out in droves. Yet as their name implies, angels are not readily visible and have to be painstakingly wooed before they make a financial commitment.
Once they latch onto something they believe in, however, they often work harder than George Bailey's Clarence to earn their wings.
It's a fine time to look for angel funding, says Jeffrey Sohl, director of the University of New Hampshire's Center for Venture Research, which is tracking increased angel interest in recession-proof industries like software, health-care services, medical technology, online social networks and alternative energy. What you need to do is get investor-ready. Know what the angels look for.
It's hard to quantify how much angel investing is taking place; many deals fall under the radar. According to the universitys research, the number of active angel investors rose to 140,000 in the first half of 2007, up 8 percent on the year as interest in seeding early-stage companies continued.
During that time, angels sank some $11.9 billion into 24,000 entrepreneurial ventures, which is down slightly from the year-ago period.
Angel funding became an increasingly prominent alternative after the burst of the dot com bubble as venture capital firms- traditionally early-stage funders - raised the bar on initial investment as well as on the measures of business viability that they require startups to meet, according to those in the tight-knit angel community.
This is absolutely filling a void, says Les Trachtman of the Saratoga, New York-based Trachtman Group LLC, which invests in technology companies looking to scale their operations. Venture capital firms upped their average investment, he said, noting that that their typical entry point is now around $5 million.
Angels often come in at the very early stage of a start-up, after so-called friends and family money has been raised, investing anywhere from $100,000 to $1 million. They may later come back with an additional round before a company seeks a higher level of funding. These days, most angels rely on the acquisition of the startup as their exit strategy, or how they earn their returns, as the IPO market has soured.
Who is an angel?
There is no clear-cut profile, but angel investors are typically proven entrepreneurs who have worked with or founded startups themselves, taken some hard knocks along the way and have a personal interest or expertise in an industry. They operate on an individual basis, as part of a loosely structured group. But they can be found in more sophisticated networks with strict protocols, sometimes pooling money into syndicates.
They'll typically look for start-ups within their own geographic regions and have one thing in common: they largely operate on word-of-mouth referrals and personal relationships. There is no overriding secret to finding them, other than turning over as many rocks as possible.
Angel investing is people to people, says Ronald Kirschner, a former anesthesiologist and president of the suburban Chicago-based Heartland Angels, a group whose investments range from information technology to manufacturing and telecommunications. It's about trust.
Where are the deals?
Angels sniff out deals a variety of ways. Many - especially those seeking hot new technologies - depend on universities to feed them a steady supply of ideas. The Venture Lab at the Georgia Institute of Technology, for one, has been the launching pad for 19 companies in the past six years, many which got their start with angel funding.
We have professors that come up with interesting idea. We have graduate students, we have undergraduates; typically they don't have the financial wherewithal to do a lot with it themselves, says Stephen Fleming, the lab's chief commercialization officer. For angels investing in technology having the infrastructure and the brain power of a big university is not required but it certainly helps, he said.
Groups like the Atlanta Technology Angels harvest that knowledge. With offices on site at the lab, ideas from the university easily flow to investors. And whether a startup comes from the Georgia Tech or elsewhere, ATA takes on several important roles that are typical of angels: mentor, strategic advisor and general sounding board. One of the lab ventures funded by ATA became Qcept Technologies, the largest provider of technology used to identify defects in the wafers used to make semi-conductors.
We'll have one or two investors work with them over time, says Knox Massey, managing director of the group, whose some 60 members include several current and past CEOs. We've worked with companies that might not be ready for a year; they might be building management, they might be trying to get that first customer or two.
Qcept CEO Bret Bergman recalls that angels were instrumental in guiding his company and setting up strong management. His board now includes such prominent angels as former Treasury Secretary Paul O'Neil, and David Lam, founder of Lam Research Corp., a top maker of semi-conductor processing equipment.
If you can find one or two people who have some connection or interest in what you're doing and get them to step forward with a little bit of money, that's how you find other angels, Bergman says.
Giving up control
To be sure, angel financing is not for everyone. Entrepreneurs can be fiercely proprietary with their ideas, and aren't willing to yield some control. Angels typically take a 20 percent to 25 percent equity stake, as well as one or several board seats. They often call for periodic meetings with management.
There's some that don't want to give up any control. They really don't understand the difference between private equity and debt, says Heartland's Kirchner, whose business card includes the line: The secret of creating value is sharing it.
Most angels require prospective candidates to give a tight 20 minute to 30 minute presentation followed by Q&A to give angels a clear idea what they'll do with the capital. This is often followed by a period due diligence that can sometimes take several months.
Don't tell me that your problem is capital, cautions Thomas Churchill, managing partner of Chicago-based ARCH Development Partners LLC, which funds biotech, life-sciences and software start-ups. Instead he wants to hear: Here's what I'm going to do with the capital and here are the milestones I'm going to hit. Here are the six things that are going to happen over the next year.