Find your angel investor: 6 tips

By Susan Schreter

Related Links Get a free business Web site and e-mail 3 ways to improve your business plan for investors Biggest financing mistakes by first-time entrepreneurs View our Office Live Small Business Web seminars Need help? Visit our Community site

Do you need $20,000, $50,000, or $500,000 for your young company? Have local bankers snickered at your audacious request to borrow money for your business?

Instead of putting your entrepreneurial dreams on hold because of naysayer banks, consider asking for help from wealthy individuals who invest in young companies. These people are commonly known as "angel investors."

Yes, it is possible to raise money from individuals who share your profit goals and innovative spirit. In fact, more restaurants, film projects, tech businesses, Web businesses, and service businesses are funded through "angels" than through venture-capital funds.

An angel may be looking for you

According to the Center for Venture Research at the University of New Hampshire, angel investing exceeded $25 billion in 2006. This is great news for startup entrepreneurs. Wealthy individuals are more inclined to invest in companies at the raw startup stage than are the more conservative venture-capital firms.

Unlike venture-capital fund managers (often called “VCs”), angels can be gutsy, fast decision-makers because they invest their own savings—and don’t have to satisfy institutional investors or partners. In contrast, VCs invest other people’s money and can lose their salaried positions if they make too many investment mistakes. VCs play it safe with a lot of time-consuming investigative research, and avoid companies that don’t have finished products, customers, or earnings.

So what’s the fastest way to find the fast-check-writing angels? Here are six ideas on where to look.

1. Angel clubs.   Today, several hundred angel organizations in the United States bring together wealthy individuals to invest in promising companies. The primary advantage of these clubs to entrepreneurs is saving time on pitches. You have the opportunity to present to dozens of potential investors at a single club meeting. The Angel Capital Association Web site lists names of active angel organizations in your state.
2. "Shared purpose" angels.   Proving the value of a startup is always easier when entrepreneurs can appeal to angels who appreciate the innovative worth of a new product or service. If for example, you have an idea for a new toothbrush, you might target wealthy dentists for angel funding. Of course, angels who share your purpose represent fast access to customers, potential distribution partners, and industry publicity, too.
3. Retired executives.   Whenever you read about esteemed executives who leave corporations to explore other career opportunities, take note. Today, 50- to 60-something retiring executives are not necessarily ready to retire from all business activities. Angel investing gives older executives a way to participate in new enterprising initiatives without any day-to-day work responsibilities.
4. Successful fellow entrepreneurs.   Entrepreneurs like yourself can copy the best lead-generation tactics of luxury goods sellers, stockbrokers, and real estate agents. They watch the business press for announcements of company buyouts and successful initial public offerings in your industry. Consider all top officers in those companies as potential angel investors.
5. Incubators.   Incubators, business accelerators, and technology clusters are buzz words for entities that provide business-management advisory services and office space for emerging companies. Sometimes, they also offer easy access to local angel investors. Check out the National Business Incubation Association Web site for a list of member business-development centers.
6. Friends and family.   Wealthy friends and family members can be a source of easy startup cash. However, if you value happy holiday family gatherings, don't ask loved ones for money that they can't afford to lose. Home-equity loans and retirement plans should not fund angel investments. Another way to keep the peace is to hold off asking family members for money until other non-family angels negotiate investment terms. This way, family members don’t pay a higher price than independent investors who know how to assess and negotiate deal terms.

Be wary of claims

Here’s a note of caution to entrepreneurs who are ready to research, network, and pitch angel investors. Numerous emerging fee-based Web sites promote their ability to match business plans to individual investors and venture funds. While I'm an advocate of pursuing all funding leads, many of these sites exaggerate their connections to potential investors.

The real deal lies in finding active angel investors who overwhelmingly prefer to write checks to local entrepreneurs, not entrepreneurs who live online or across the country. Angels value personal relationships and the good will recognition of supporting entrepreneurial organizations within their own community. For this reason, I coach entrepreneurs to pitch wealthy people within a 350-mile radius in densely populated regions, or a 500-mile radius in more rural regions.

Lastly, the fastest way to kill your financing network is to not accept "no" as an answer. Angel investors don't want to be hounded. But you can follow up every negative response with a polite request for guidance. Ask, "If you were in my shoes, where would you go next for funding?" Also ask, "What can I do to improve my business plan and investment presentation?"

About the author   Susan Schreter is a Seattle-area investment banker and venture-funding expert serving startup entrepreneurs and fast-growth company executives. She also teaches business financing and entrepreneurship at business schools, angel forums, and microfinance organizations in the United States and internationally. Write to Susan at susan@takecommand.org.