Monday, November 17, 2008

Attracting Angel investors.

The word “Angel” originated on Broadway, to describe people who put up the money for theatrical shows. Historically, they seldom got their money back. In 2007, 400,000 Angels invested $25 billion in tens of thousands of startups according to the Center for Venture Research at the University of New Hampshire. These high net worth individuals typically put between $25,000 to $500,000 of their own money into early stage companies, an investment that’s often locked up for five or more years. Usually, Angels provide second-stage financing, after an entrepreneur has raised seed capital, but before the entry of professional venture groups who provide larger sums (preferably greater than $3 million) when the business is well established. Recent research tracking 1,200 Angel investors for ten years showed that 70% lost all or part of their money or got their money back with no return. However, some of the other 30% achieved spectacular returns and their success keeps everyone else in the game. To be a successful Angel investor, you may have to kiss a lot of frogs.

Angels invest primarily in people. Since there’s little or no business in the beginning, they focus first on the venture team, then on the idea. They look for a match in chemistry and interest. Their interest may be that they like the technology, or they may be a friend of the family. One of the benefits of working with Angels, apart from the money they bring, is the management assistance and board participation that’s available from experienced business people. Angels will often give a company a higher initial valuation than other investment groups. But remember that Angels may not be there for the next round when you need more money. Being overvalued at the start will likely result in a “down round” later on. When this happens, it looks bad and slows down the process of attracting more money. Investors want to see the company’s valuation in each financing round moving up. Once outside investors own a significant amount of equity in a company, the objective is not to keep other investors away but to find new ones who will pay a higher price than they did for equity in the company, thereby raising the value of their investment. So after the first round, talking to other investors, such as VCs, isn't just okay, it's encouraged. VCs hope to double or triple the startup's valuation from one round of financing to the next.

San Diego technology investor, Charlie Gaylord, likes to invest in market-driven rather than in technology-driven companies. He likes emerging markets that create new ways of delivering value to customers. He likes business models that disintermediate people who add more cost than value and eliminate the costs of inventory. He likes new models where you can build and create value in the brand very quickly. He hardly ever reads the details of the initial business plan’s financial projections. He’s more interested in the thinking behind it than in the details of the business plan.

What rewards are Angels looking for?
- they want financial returns (of course), but also
- the excitement / promotion of the business.
- they like the product, technology or team.
- they want bragging rights.
- they look for ways to leverage their experience / expertise in time, money and knowledge.

Gaylord says he'd rather have a company that dies quickly than one that limps along and never goes anywhere. In other words, he’d rather lose his money than lose his time.

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