How
to Divine Resources from Angel
Investors and Venture Capitalists
Are you an entrepreneur hoping
to be touched by an angel investor? Or are you willing to strike a somewhat more
faustian bargain with a venture capitalist? Either way, these two
non-traditional sources of business funding can inject needed financing into
your fledgling business.
If your business is too young,
too risky, or too undercapitalized to qualify for traditional financing, raising
money becomes a problem that can only be solved by non-traditional private
investment sources such as so-called angel investors and the venture
capitalists. The following provides some answers to questions entrepreneurs
frequently ask about venture capitalists and angel investors.
What is Venture Capital?
Venture capital is risk money
that is provided to a business by a venture capitalist, that is, an individual
or a firm interested in funding privately held companies that have the potential
to provide very high rates of return on investments. Venture capitalists don't
just invest their own money — they seek money from wealthy individuals and
institutional investors who want to allocate a percentage of their portfolios to
potentially high-return investments.
What Do Venture Capitalists Look For?
Bankers look at past
performance; venture capitalists look at future potential. Venture capitalists
seek out companies that show promise for very large profits within a relatively
short period of time. Typically, they focus on companies that have identified a
new trend or some major change in the market that can result in a quick boom
market. High-tech companies tend to be the primary recipients of venture capital
financing.
Most venture capitalists are
scouting for companies that have several years of operating history under their
belts and that are staffed by highly experienced management teams. In recent
years, a large global market for the company’s products or services has come
to be an important selling point.
What Should You Know Before You Go to Venture
Capitalists?
In exchange for their
financial backing, venture capitalists usually demand a significant amount of
control of the company. Ownership demands of anywhere from 30% to 50% or more of
equity interest are not uncommon. So, before you get involved with venture
capitalists, be sure that you are willing to share, or give up, a substantial
portion of ownership and control in your company. Bear in mind, too, that a
minimum capital investment of $1 million to $2 million is about average. These
higher minimums are becoming the norm as venture capitalists recognize that a
few large deals require less management time than many smaller ones.
How Do Angels Differ from Venture Capitalists?
The term “angel”
originated on Broadway, when financial investors contributed their money and
skills to enhance a show’s chance of success. Over the years, the name came to
be applied to a wider range of commercial ventures. Today, angels might be
individuals or groups of local business people who are interested in assisting
new businesses. Angels typically provide seed money for companies that are just
starting up or for very young companies. Also, angels tend to invest in small
businesses closer to home because, in many cases, they are looking for endeavors
that will enhance their communities.
Unlike venture capitalists,
angels generally are not interested in controlling the business, although they
often do take on an advisory role offering their experience and advice in
guiding a company. In many cases, angels prefer to keep their investments under
$100,000 so they can spread their risk over several companies.
How Do You Find an Angel?
Like their namesakes, angel
investors are elusive. But also like their namesakes, angel investors tend to be
those who are already looking out for your best interests such as friends,
relatives, acquaintances, business advisors and professionals who believe in
your ability or your ideas and who are willing to invest significant amounts of
money to help you get started.
Networking within your
community and your industry often provides a good starting point for locating an
angel. In some parts of the country, angel networks have formed to bring
entrepreneurs and investors together. One large network is the federally-funded
Angel Capital Electronic Network (ACE-Net), an Internet resource developed by
the Small Business Administration in collaboration with the Securities and
Exchange Commission, state securities regulators and others. ACE-Net screens
small businesses and potential investors, providing new options to small
companies looking for investors and investors looking for promising
opportunities.
If your small business fits the profile for funding
by a venture capitalist or angel, consult with your tax advisor. He or she can
help you prepare for approaching these valuable funding sources, which can send
pennies from heaven.