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FEATURE STORY

Money from Heaven?
How Angel Investors can change the face of your growing enterprise

There’s a new trend in raising capital for small business enterprises (SBE). Angel investors have been around for the last twenty years or so, but in recent years, they have started pooling their resources by forming Angel Investing Clubs for both fun and profits. “Nearly 400,000 angels invest up to $40 billion annually in 50,000 companies,” says Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire in a recent BusinessWeek article. That’s a pretty sizable impact on the small business economy. How you approach angels and pitch your business can make or break your enterprise’s future.

What does it take to be an Angel Investor?

The Securities and Exchange Commission (SEC) requires that investors be accredited by meeting the following standards:

• A net worth of at least $1 million (excluding home, furnishings and automobiles).

• An annual income of $200,000 (for single) and $300,000 (for married) investors for two previous years with expectations for meeting these financial guidelines in the current investing year.

Nerves of Steel

Experts recommend that the investor shouldn’t invest more than 5% to10% of their disposable income. “It’s a risky business and not something that should be taken lightly,” says Rose. Unlike VC that is invested on a far shorter time horizon, angel investors are in the game for as long as five to ten years.

Unlike Venture Capitals (VCs) or Private Equity Groups (PEG) who look to invest a pool of dollars in relatively short term projects that can turn as much as 50% or more return on investment (ROI), angel investors are investing their own dollars, are committed for a longer period, and expect to see a substantially smaller ROI (35% or less), if they see one at all.

A recent study by Gerald Benjamin, senior managing partner of International Capital Resources, a San Francisco firm that matches investors and companies outlined the risk. He looked at the returns that 1,200 angel investors achieved between 1989 and 1999. Nearly 70% of them either lost all or part of their investment or got their money back with no return. Only 30% of them got a return--but those returns ranged from 2 to 10 times their investment . The reality is that angel investing isn’t a hobby or for the faint of heart.

With angel investing clubs, the risk is more distributed, but there’s still a considerable commitment. Members spend a good amount of their time researching investment opportunities, attending meetings and even mentoring their investments by serving on boards of directors or as advisor consultants to their investment enterprises.

How to pitch to an Angel Investor

Now that you know a little more about angel investors, let’s unlock some of the mystery about requesting some of their funding.

With angels, the investment is all about the entrepreneur. “There’s a saying in the business world; bet the jockey not the horse,” says David S. Rose, tech investor, entrepreneur and owner of Angelsoft, an angel investment group, during a web interview with BusinessWeek.com. “We ask ourselves, ‘Is this the person? Does she have the passion, integrity, learnability, and experience to make this venture successful?’ We see two and three of the same type proposal every few months, and ultimately the decision comes down to the entrepreneur standing in front of us. We are buying you, the business person, so you have to be selling you to the best of your ability.”

In early stage, pre-profitability investing, the business doesn’t have the financial track record to prove profitability. We look for the business to effectively sell the entrepreneur. There’s a real change today in how companies get funded. Let’s look at the tech market. “The cost of entry into technology based enterprises twenty years ago could be as much as $15 million in order to manufacture chips,” says Rose. “Ten years ago that same entry cost was $1.5 million and today with the advances in the Internet, a company like Facebook can get off the ground with as little as $150,000. That (amount) is too little for VCs to consider investing, but really falls into the sweet spot for angel investors.”

Make sure the deal is ‘right-sized’ advises Rose. This is not a big market economy, so SBEs need to be very specific in their written proposals and oral presentations.

• If there is a dollar amount needed, state it. Don’t guesstimate or dance around the number, be frank about what is needed provide back-up data to explain how it will be used.

• Have a business valuation. What is the company worth? How much will be needed (pre-money valuation)? Angel investors are using an equation like this one: Pre-money valuation + angel investment = post $ valuation

• Don’t use Powerpoint presentations as a crutch in lieu of delivering a winning presentation. Use limited verbiage on the slides and don’t read or even look at the slides you’re using. Use engaging images or one word keys to drive a point home. Remember that the slides are a visual aid for your audience and not you!

• Have a solid team. You may be the most exciting and knowledgeable businessperson alive, but if you don’t have an equally compelling team backing you in the boardroom, you’ll likely find your proposal rejected.

• Articulate your market opportunity. Remember that the best proposals are businesses that fulfill a unique market need in an uncluttered segment of the market. Don’t try to seek capital for a venture in a market where another 1,000 widgets already exist doing exactly what your widget does. Find a new niche, a new target customer and prove that your idea will change the way things are currently being done.

• Have a credible, compelling story to tell. Don’t waste investor’s time by giving the same song and dance that the previous ten prospects brought to the table. Look for your unique selling proposition (USP) and defend it with validation (e.g. an advisory board of credible industry experts, beta or happy paying customers as testimonials, or a partner who lives and is well-known and respected in your industry).

• Write a rockin’ executive summary. You have less than 30 seconds to grab your angel investor group’s interest and continue with your pitch. Don’t waste precious seconds rambling about your dreams, how great you think your widget is, or how your mother ‘just loves the idea’. Rather present the problem and how your product or service will BE the solution. Be specific about how their investment will be realized in solid returns and don’t forget to wrap up the summary with ‘the ask.’

Socially conscious angels, of course!

As the number of socially-conscious businesses soars, it stands to reason that socially-conscious investors would follow suit. And follow they have. In all, according to a study by the University of California at Berkeley, Cleantech Network, and Environmental Entrepreneurs, venture capitalists invested $2.9 billion in such businesses last year, up 80% from 2005. Only software and biotechnology drew more funding. For more information and to find the right angel for your venture, visit the Social Investment Forum, socialinvest.org. They’re a group of about 500 individuals and organizations interested in socially responsible investing.

Depending on your venture and the capital that you require, angel investors may be just the thing to take your enterprise to the next level. Be vigilant and learn as much as you can about each angel group and be prepared to make revisions and ongoing changes to your pitch. To learn more about angel investing and how it can impact your small business, talk with a Fiducial Advisor by calling 866-Fiducial or visit the web at www.Fiducial.com.