How can small businesses get their hands on the cash they need to run their businesses, without having to rely on obstructionist bank lending officers and disinterested venture capital firms?
How about working with an angel investor?
Increasingly, angel investing has become the option du jour for frustrated high-growth entrepreneurs, with more and more business owners flush from big funding deals with angel companies.
Just how big is angel investing these days? According to the Center for Venture Research, American angel investors plugged $19 billion into 55,000 deals (that’s approximately 35,000 small businesses) in 2008.
Most funding was for start-up or early-stage companies. By most estimates, there are more than 200,000 active angel investors in the U.S. today.
According to an Oct. 29 story in The New York Times, angels are looking for companies with more modest capital requirements — the very definition, financially at least, of small businesses. The Times says angels seek companies “that bootstrap, beat quicker paths to profitability and have proven management teams.”
In a word, angels offer unique advantages to business owners. More often than not, angel investors reside in the same geographical area as the entrepreneurs looking to them for funding. That proximity lends itself to actual hands-on mentoring and the type of close relationship that historically translates into successful partnerships.
Angel investors also typically provide the right amount of business funding — not too much and not too little — and are more amenable to investing in smaller, riskier ventures.
If your small business needs an angel infusion, how do you start? Let’s take a look:
Know who you’re dealing with. For starters, don’t confuse angel investors with venture capital firms — that’s a common mistake small business owners make. According to the Angel Capital Educational Foundation, venture capital money usually comes from larger institutions, while angel cash usually comes from individual sources (usually local ones). In addition, venture firms prefer late-stage (as in “lower risk”) companies, while angel investors will work with start-up and early-stage companies.
Know how much money you need, not what you want. Angel investors can fund your small business with as little as $5,000 or even up to $1 million in capital. If you need much more than that, you’re likely going to need to talk to venture capital firms.
Know what angels expect. To gain angel capital, expect to exchange some ownership of your business for funding. Also, expect to return the investor’s money — plus interest — within three to seven years.
Know the criteria. Wait until your product or service is up and running before approaching an angel investor (that could mean having to exhaust your own funding resources first). You should also have existing customers and be able to show your angel investor that your company can grow quickly and become a multi-million dollar firm (in most cases) within three to five years.
Start looking for angels in your own community. Join local business groups, like the Chamber of Commerce. Ask around, investigate angel groups — communities of local angels that pool money to invest in small businesses — and be prepared to present in front of the group, with a good business plan in hand.
With credit tightening and venture capital firms reluctant to look at small businesses, angel investors are manna from heaven for cash-strapped small companies. Just make sure to do your due diligence — and be prepared to show angels that your business can spread its wings and fly, with a little lift from angel investors.
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