Raising Capital Best Practices

The Halo Effect
Seeking Angel Investment Capital
By Carl Treleaven
Published: September / October 2008

Angels are high net worth individuals or groups who invest in new ventures. They are often the best source of capital for the entrepreneur after he/she has tapped out “friends and family”.

Generally speaking, angels are a good funding source if the entrepreneur needs between $150,000 and $1.5 million. Some angels will fund less and some more. Usually, however, funding below $150,000 is for “friends and family” and more than $1.5 million is generally the province of venture capitalists. Angel funding offers the following financial benefits:

• Significant capital when “friends and family” are tapped out, but before the enterprise can qualify for bank financing or venture capital

• The amount of funding necessary to get the new enterprise to a point where it will qualify for venture capital or even bank financing.

Apart from funding, the great advantage of angel investors is that they are often experienced entrepreneurs themselves and can offer insight and guidance to the entrepreneur. Other funding sources usually can’t offer this. In many cases, the angel desires to become actively involved in the business, serving in the capacity of business advisor or mentor. Angel investment groups are especially good for this because the group often is composed of individuals with various types of business expertise (e.g., marketing, finance, manufacturing, distribution). Many angels are themselves no longer working full time, but have no desire to confine themselves to traditional retirement activities. Many have a great desire to help new entrepreneurs, much as they themselves were helped when they first got started in business.

On the other hand, seeking and obtaining angel funding is not an unmixed blessing for the following reasons:

Cost of securing the investment

Angels, especially angel groups, are often very sophisticated investors. Obtaining funding is comparable to trying to “close” a major customer. The entrepreneur can expect to make multiple presentations and to undergo sophisticated “due diligence,” an entire process that can easily take 3 or 4 months. The entrepreneur will need to devote considerable effort to this process. At the same time, angel investors will normally require the entrepreneur to execute sophisticated securities agreements that may cost considerable sums to prepare. The entrepreneur needs to be prepared to hire top notch legal counsel to represent him/her. All of this money and time is taken from building the business.

Time horizon of the investment

Angel investors usually make an investment for 3 to 7 years. As such, on the day an entrepreneur receives angel funding, he/she needs to keep in mind that a clock has begun to tick. The alarm on that clock will ring at some point in 3 to 7 years. When the alarm rings, the angel investor seeks to “cash out” his/her investment, generally in one of the following ways:

• Having the company “go public”

• Having the company sold to another company

• Being “cashed out” by a third party

If the entrepreneur doesn’t think these are realistic outcomes, he/she should avoid angel investors. For example, if the entrepreneur wants to build a company that might be passed down to the next generation, albeit a very worthy goal, angel investors may not be the best place to seek capital, especially because of the cost of “cashing out” the angel in several years.

Performance expectations and reduced independence

Entrepreneurs often start businesses in order to be their own boss. Stated frankly, when the entrepreneur accepts angel funding, he/she has just taken on a new boss with performance expectations. The angel wants the entrepreneur to run the business, but he/she will want to provide input. At a minimum, this will include a board seat. The entrepreneur needs to be prepared for some loss of independence. If this is unpalatable, angel investment is not a good idea.

“Lifestyle” business

If the entrepreneur wants the business to create a nice lifestyle, avoid angel investors. Angels usually hate “lifestyle” businesses. This is a business which is designed to provide a job and a very nice living for the entrepreneur, but isn’t ever expected to become a significant enterprise.

If the entrepreneur decides that the angel route is the right one, he/she can improve the chance of obtaining financing by doing the following. First, consider only angels within a four hour drive of the company. Second, make sure to choose angels interested in your industry segment. Third, prepare the investment proposal using the format requested by the angel. While this may seem like a “flash of the blindingly obvious,” it is amazing how often entrepreneurs submit plans which fail to do this. Usually, this means the funding request takes a quick trip to the “circular file.”

The entrepreneur should try to avoid the following mistakes when submitting the funding proposal:

• Focusing too much on the technology/product/service

• Failing to talk about competition (actual or potential)

• Failing to talk about how the product will be distributed/sold

• Failing to describe the revenue model of the business (i.e., how the business will make money, who will buy, etc.)

• Failing to talk about the value proposition and how the product/service is differentiated from other offerings

• Requesting too little funding, over too short a time horizon

Angel funding is not a panacea for the entrepreneur with a great idea and/or a growing business. For many, though, it is an excellent source of funding and managerial/development support. By following the guidelines outlined above, the entrepreneur can more effectively determine if angel funding is appropriate, and if so, increase his/her chances of receiving that funding.

Carl Treleaven is an active angel investor, both individually and as a member of New World Angels, a Florida-based angel group, and Piedmont Angel Network, an angel group based in Greensboro, North Carolina. He is CEO of Westlake Ventures, a firm with various investments in printing, software, banking, and real estate. Previously, he was CEO and owner of Pharmagraphics, a specialty printing company based in Greensboro, NC. He and his wife live in Madeira Beach, Florida.

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