Tag Archives: angel investors

Update on Angel Investors

Angel investors are often one of the first things an entrepreneur thinks about when beginning their search for money to start their business.

Unfortunately, this can be a daunting task.

Today, Angel investors can be divided into two general groups:

  1. The first group of Angels makes larger investments, primarily in high-tech enterprises nationwide. These are often referred to as “Super Angels.”
  2. The second group of Angels makes smaller (and earlier) investments in local startups. They are likely to be successful business people living in your hometown.

For the first group of Angel investors, the Angel Resource Institute recently released its annual “Halo Report,” which is a survey of Angel investments over the past year—2012.

The “Halo Report” presents the results of a survey of 738 deals totaling $1.1 Billion during 2012. Following are the highlights of this survey data:

  • Internet, Healthcare, Mobile & Telecom, and Electronics made up 70% of the deals.
  • Most common investment size in 2012 was $600,000 ($690,000 ave. for 4th quarter).
  • 63% of recipients were already producing revenue.
  • Co-investment (multiple Angels investing in same deal) deals were most prevalent in this first group of Angels with 70% of all deals being made by multiple investors.
  • Median investment with multiple investors was $1.5 Million.
  • Over the past two years, the value of companies receiving investments from this first group of Angel investors has averaged $2.5 Million.

Obviously, this first group of Angels is only interested in the high-tech, high potential profit companies that are already established and either already producing revenue, or are about to.

Most of the vast majority of the 6+ million new business startups this year do not fall into this high-return-on-investment requirement and must look elsewhere for their startup money.

There are a variety of alternative sources of startup financing available, but if you are interested primarily in Angel Investors, you will need to look much closer to home … for Angels in the second group of investors.

I would suggest that you do this search for your investors through your Advisor Group, banker, attorney, accountant, or business network.

There are many qualified Angel Investors in every city and town around the country—all you have to do is find out who they are … and then make your very best presentation to anyone you contact.

Just keep in mind that if all the investments by Angel Investors and Venture Capitalists were added together each year … the total would barely make a dent in the total startup money required by the 6+ million new full-time businesses that start up each year.

There are many ways to finance a new small business besides Angel Investors and VCs … it just takes a little digging to find them. You can get some help here.

How many of you have used either Angel Investors, or some alternative form of investment (equity) capital to start your business?

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Funding For Startups

When talking about funding for startups, I continually find it interesting (and disheartening) that the business community so closely (exclusively?) associates “startups” with Venture Capital. In fact, a young entrepreneur recently told me that a business should not be called a “startup” until they begin searching for venture capital.

The Reality

That was a very naïve comment, and here’s why: According to the Kauffman Foundation, there were over 6.5 new businesses started in the U.S. during 2010. Also, according to PriceWaterhouseCoopers reports, there were 3,277 venture capital deals made during 2010.  Not very good odds.

So, where did the funding for startups come from to start the remainder of the 6.5 million new businesses?

Angel Investors

Certainly some financing came from Angel Investors, but their requirements are not that much different from the VCs. Angels usually precede VCs and get a company started before the VC becomes involved.

The data is elusive, but It appears that (certified) Angel investors may not have made substantially more deals than the VCs did. Even if they made 10 times as many deals as the VCs, that would only account for about one-half of one percent of the total startups for 2010.

Angel investors are actively coming together as “groups” that act on new venture deals as investing partners, just like the Venture Capitalists. The lone wolf angel investor is a dying breed.

Banks

Of course, no bank is going to provide funding for startups (other than, perhaps, a personal loan to the entrepreneur…if they have substantial collateral). There is also no indication that banks will begin more aggressive lending to businesses, especially small businesses, anytime in the foreseeable future.

Banks certainly are not the answer now, or any time soon.

SBA Loans

We need to remember that SBA loans are made by banks, not the government. SBA loans are only partially guaranteed by the government, and I have been told by many bankers that their SBA loans must meet the same borrower requirements as a non-SBA loan. Therefore, in reality, the SBA is not the answer either.

Grants

There is no such thing as a U.S. government grant available for the purpose of starting a for-profit company. There can be local “incentives” like tax postponement, subsidized property or facilities, etc., but finding grant money to start a for-profit business in the U.S. is like finding the Holy Grail.

While many of the economically emerging countries are offering strong incentives to entice American entrepreneurs to start businesses in their country, the U.S. seems paralyzed about doing anything to keep those businesses here, let alone expand our own business community.

Who’s Left?

Well, that still leaves something over 6 million new startup businesses without any realistic form of  outside funding. That means the primary sources of funding for startups available in the U.S. are: (1) the entrepreneur’s personal borrowing capacity, (2) family, and (3) friends.

Unfortunately, for nearly all of the over 6.5 million new U.S. businesses that will start up during 2011, the only investor decision that can be made is which family member or friend to approach first. Very sad.

How did you fund your startup business?

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Angel Investors and “Super” Angels

Angel investors have long been the backbone of early financing for startup businesses. They have stepped in when money from family and friends runs out. Angel investors have traditionally filled the gap between owner-raised investment money, and venture capital investments.

Now, however, Angels are banding together and forming more “groups” of investors—Super Angels—to raise the limits of their investments, while spreading the risk. This creates a new “grey area” where the Super Angels and Venture Capitalists overlap.

According to a recent study by the National Association of Seed and Venture Funds, the number of Super Angels has grown 40 percent just in the last year. More importantly, 51 percent of association members have indicated that they intend to invest more money in startup companies this year than they did last year.

This is good news for entrepreneurs—as long as you are properly prepared to fast-track the growth of your business. Super Angles want to see a strong management team that can make the most of their investment money. Neither Angels, nor Super Angels will invest in just an “idea”—they want the entrepreneur(s) to be operating and have some skin in the game already.

In addition, your business needs to have the potential for explosive growth to tens of millions of dollars in revenue in just a few years. Also, you will need to convince a Super Angel that you can return three to five times their investment within five years—usually through acquisition.

This is good news for high-potential startups, but you will need to prepare well before you meet with investors. Even though there is investment money available, there is tremendous competition seeking it…so you better bring your “A” game.

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