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Angels are a particularly rare breed of investor. Whereas venturecapital firms and funds invest other people's money in newbusinesses, angel investors invest their own money. Willing to takegreat risks, they are the start-up entrepreneur's best friends.Attracting Capital from Angels offers an in-depth look at the whiteknights of the entrepreneurial world.
Angels most often assist a company when it may be little more thanan entrepreneur's dream. Frequently, they offer more than money:serving as coach, mentor, and champion, and often providingguidance from the point of view of one who has experience turningideas into fortunes.
This book is the product of fifteen years working with, observing,and listening to entrepreneurs and angel investors as they pursuedthe entrepreneurial dream. It features top-notch researchsupplemented by in-depth interviews with angel investors andentrepreneurs. The personal stories presented here will help youlearn from the mistakes of other entrepreneurs and model yourapproach on their successes.
From the entrepreneur's point of view, gaining an understanding ofthe angel as an individual is an important factor in determiningwhether the partnership will be successful. As such, this bookprovides an inside look at angel investors and a comprehensiveunderstanding of the "how" and the "why" of what they do. Itprovides guidance on finding the right angels, avoiding the wrongones, and making a business work after an angel buys into it.
* Angel investors versus venture capitalists
* How angels identify promising investments
* Selling a business plan to an angel investor
* Spotting frauds and cheats
* The importance of obtaining sound legal advice
* Attracting angels to your business
* Angels' approach to valuation
* Working with an angel after closing the deal
Finding capital for your company is one of the most difficult andimportant tasks an entrepreneur must undertake, and Brian Hill andDee Power will help you do it right. Both a practical "how-to" bookand an authoritative resource on angel investors, AttractingCapital from Angels will tell you everything you need to know tofind your own divine source of capital.
* * *
It's really this simple: Angel investors are the start-up entrepreneur's best friend. Wealthy individuals, or angel investors as they have come to be known, are by far the most important source of capital for early-stage ventures, and as such are vital contributors to our economy's continued growth and prosperity.
Financial angels have earned their wings through prior business success, accumulating wealth and wisdom that they re-deploy in ventures founded by the next generation of entrepreneurs. They willingly, even cheerfully, assume financial risks that would frighten off even some of the most experienced venture capital firms.
Remarkably, they take these risks not only in search of great rewards, but also because of an unshakable belief in the viability-and necessity-of entrepreneurship. And they invest many times at the very earliest stage of a venture, when there is little more there than the dream of an entrepreneur. They come in at the most exciting and confounding era in a company's development, when the outcome is very much in doubt. They serve as coach, mentor, champion, white knight, and hero, helping the company along through good times and bad. Their guiding principle is that uniquelyAmerican vision that tomorrow is undoubtedly going to be better than today. Very often, theirs is an amazingly clear vision, based on the success angels have achieved with these investments.
Equally remarkably, these angels are often people who have just completed a lifetime journey of long hours, worry, never-ending problems, huge responsibilities, disappointment, and elation in order to build their own company. So what do they do? They sell their company, then turn around and seek to experience it all again from the start-up stage.
For the typical entrepreneur, angels represent the most attainable source of capital. Angels are not just the best friend; they sometimes are the only friend on the lonely entrepreneurial road.
Who Are Angels?
Angel investors are definitely a Nation of Individuals (and colorful characters). The most common type of angels are generally thought to be older businesspeople who may have sold the companies they started, and now put money in early-stage companies as a kind of hobby/investment opportunity. But this is certainly not the only type. With angel investors, generalizations are elusive and hazardous.
A relatively recent phenomenon is a younger group of high-tech millionaires who have decided to reinvest some of their winnings from taking their own companies public. The stock market correction of late 2000-2001 notwithstanding, the boom in the market over the last years of the 1990s sent the assets of many upper-middle-class individuals up to levels that allowed them to join the ranks of wealthy individuals. With the optimism born of dizzying stock market gains, many of these people decided to become angels as well.
We are even seeing a recent phenomenon of not-so-rich individuals who are trying to crack into venture investing indirectly, by buying public shares in entities that, in turn, put capital into early-stage deals.
ANGELS AND THE WORLD THEY OPERATE IN
Who would be best able to describe the world of angel investing, the financing of early-stage ventures?
Should we view this marketplace as survival of the fittest, in which all the ideas and management teams do battle against one another, until the best ones-the ones with the highest potential returns and likelihood for success-emerge the winners and get capital? A marketplace in which, at the end of the day, the companies who should get capital, usually do?
Or is the marketplace for start-up capital a place where pluck and perseverance-the ability to pick yourself up and dust yourself off-continue on despite repeated dead ends and disappointments, and are rewarded with the ultimate result of successfully finding investors? Are the stories of successful entrepreneurs heartwarming and uniquely American?
Or is it best viewed through the looking glass, a strangely alien, disorganized world where serendipity, chance meetings, and the secret password of "whom you know" determine who will get capital, where rational analysis gives way to gut instinct? Is this strange world a place where you want to get in, get your capital, and then get out and return home as soon as possible?
In this book, you will see examples of all three, and a key question is investigated: Is it possible to find rules or guidelines an entrepreneur can rely on when seeking angel capital, or is every situation completely different because every company is different, as is every angel investor?
We believe that to understand angels, it helps to look at them up against their more visible and well-publicized counterparts, the venture capital firms (VCs), because the behavior and investment interests of angels are shaped by an important difference with VCs:
Angels invest their own money they or their families and companies have earned.
VCs invest money they have raised from other financial institutions and wealthy individuals.
Thus, we can use this general definition of angel investors: A person, partnership, or corporation that uses his, her, or its own funds to invest in private companies, which are often early-stage companies but not exclusively. This is in contrast to venture capital firms that raise money from institutions (pension funds, insurance companies) and sometimes from wealthy individuals, and then invest the money on behalf of these limited partners in primarily later-stage companies (but, again, not exclusively). Venture capitalists, then, are really money managers. Angels put their own (usually hard-earned) money at risk. Angels have created wealth in the past in their own entrepreneurial ventures and now put a portion of the wealth to use in building another entrepreneur's company. They make the money, then they manage it. Venture capitalists invest private equity as a full-time job. Most angels only devote a portion of their time to making and watching over these investments.
Entrepreneurs who want to raise money successfully from angels have to keep these facts mind, because most of the advice that entrepreneurs read or hear about regarding raising capital is primarily applicable to working with venture capital firms. Venture capital firms are much more well known. They are interviewed more often, and their activity and methods are easier to observe.
Although some standardization is emerging as a result of the formation of angel groups that invest as a unit, the negotiation and due-diligence process with angels varies widely with the angels themselves. This implies that, from the entrepreneur's point of view, gaining an understanding of the angel as an individual, prior to taking money from the angel, is an important factor in determining whether the partnership with the angel will be successful.
Do They Have Cell Phones in the Clouds?
In our book, Inside Secrets to Venture Capital, one entrepreneur observed, "VCs are like UFOs, everyone talks about them but they are seldom seen."
If that's the case about VCs, then financial angels are very well named: The angels depicted in art and literature are spiritual beings that are immortal, not easy to find, may be all around us but are typically unseen. They serve as guardians or advisors to mere mortals, and exhibit virtues such as goodness and selflessness.
Financial angels know they are mortal, but they hope to build enterprises that will live on after they are gone. Financial angels are not easy to find, certainly, but we pass them on the street every day, even in small towns in rural areas. The most competent financial angels take their role as advisors very seriously. Are they good and selfless? That's a tough one. If you set about to help someone and in the process greatly enhance your own wealth, are you selfless?
Medieval angelology tells us there are nine levels or orders of these beings. If we were to create an order or ranking of financial angels, how would we do it? Would we base it on:
How old they are?
How much money they have?
How easy they are to work with?
How frequently they make investments?
How skilled they are at advising companies?
How fast they act in making investment decisions?
How successful they have been in their own business?
How knowledgeable they are about your industry, or market?
How well connected they are with other investors, including venture capitalists?
The highest angel from the entrepreneur's standpoint would be one who can comfortably write a check for the full amount of capital the company needs, provides positive support but does not try to get too involved in running the company, can zip through the due-diligence process in 30 days, has a great deal of practical wisdom to provide based on his or her own considerable success, understands the company's market enough to share the entrepreneur's enthusiasm about the venture, and is already thinking about the perfect venture capital firm to bring in for the second stage of the company's financing.
Does this highest, perfect angel exist? Sure. You will meet several of them in this book. They are just referred to as angels, though. They were far too modest to let us designate them as perfect. That's part of the reason they deserve the designation. If someone in the financial world has to tell you how great they are, they probably aren't.
THERE IS A DARK SIDE TO WATCH OUT FOR
If you have read the preceding paragraphs, right about now you may be hearing in your head the theme music from the old TV series, The Saint, and expecting the halo to appear over Simon Templar's head. Before we conclude that he is representative of angel investors, we might want to switch channels and go over to the contemporary TV series, Angel. The hero on that program is a vampire who tries to do the right thing and help little, suffering people, but sometimes he lets his unnatural affinity for blood get the better of him. At his worst, though, he is still generally a far cry better than his archrivals, a consortium of guys in dark suits who work out of a high-rise and try to take over the world.
Substitute the words investor, start-up entrepreneurs, greed, and venture capitalists and you pretty much get the idea that whenever you are out there looking for capital, it pays to watch your back.
Just as Angel works in a shadowy world where seemingly attractive people with absolutely perfect hair can turn into horrible demons right before your eyes, the true motives of angels are many times unseen until much later in the transaction. Fortunately, bad angels do some things that tend to give themselves away before it's too late for the entrepreneur to escape. Their unwillingness to meet with you before dusk is one example. Nobody's that busy.
Risk Capital and Ultrarisk Capital: Not Investments for the Faint of Heart
Funding of early-stage companies involves a high degree of risk, as we all know. The capital that VC firms raise for their funds is sometimes called risk capital to reflect this reality. But venture funds also employ a number of strategies to mitigate the risk. The investments they make are often a blend of early-stage-even seed-stage-companies, and later stage, the Series B or Series C round of financing, as it is sometimes called. These investments would be made to help already successful companies expand and hopefully dominate their markets, and they are, therefore, significantly lower in risk.
Venture funds also spend time and money to get their names known, to, in effect, create a brand image for the fund that allows them to receive a large number of deals, and hopefully the best quality deals. Venture funds also have experienced staff members who know how to evaluate the growth potential of a given company thoroughly prior to funding it. Venture funds rely on complex legal agreements and complicated deal structures to protect their investment and allow them a certain degree of control over the direction of the enterprise.
Angel investments, then, should be called ultrarisk capital. Angels often provide the very first funding a company gets-when few milestones have been reached, and the company has not in any way demonstrated that its business model will be successful. Sometimes, they put money into a deal that is not even a company yet; it is just one or more individuals with the vision of a company in their minds.
When we asked the question, "Why do you want to be an angel?" we got nearly the same answer every time, whether we talked to angels, managers of angel networks, attorneys who represent angels, and even, sometimes reluctantly, venture capitalists. Angels get involved because many of them are highly successful with these investments. They frequently make tremendous returns on their investments and get the added psychic satisfaction of contributing to the growth of a company, and even of helping their community and nation. And they have fun doing it.
Angels succeed. That is the lesson you learn when you study this field of investing. But why do they succeed, how do they do it, and how can an entrepreneur tap into this large and growing source of funding? We hope to provide the answers to these questions in this book.
EARLY-STAGE INVESTING IS WHERE THE RETURNS ARE
Why do angels concentrate their activity on early/seed-stage investments? They know that's where you make the highest rate of return.
We tend to think of the last five years as the red-hot period for private-equity investing, and the 28.3 percent return that all private equity earned, as shown on Table 1.1, certainly bears that out. But look at how early/seed-stage investors did over the last five years-a return of more than 65 percent, and more than double that earned by later-stage private-equity investors.
For those wealthy enough to play in this arena, those who won't be that adversely affected even if the company they invest in turns out to be a bust, it can certainly be an exhilarating experience when you succeed. If you held an investment for five years and it earned 65 percent annually, your $100,000 investment would be worth $1.2 million.
Angels love start-ups just as much as start-ups love angels.
Excerpted from Attracting Capital From Angels by Brian E. Hill Dee Power Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
Foreword by Bob Bozeman.
Foreword by Randy Haykin.
WHAT IS AN ANGEL AND WHAT DO ANGELS WANT?
CHAPTER 1: The Fascinating World of Angel Investors.
CHAPTER 2: Trends in Angel Investing.
CHAPTER 3: What Is an Angel Investor?
CHAPTER 4: Why Do People Want to Be Angels?
CHAPTER 5: The Challenges of Being an Angel.
CHAPTER 6: Angels Compared to Venture Capitalists.
CHAPTER 7: What Do Angels Want?
CHAPTER Entrepreneur Characteristics That Attract Angels.
TYPES OF ANGELS.
CHAPTER 9: The Many, Many Types of Angels.
CHAPTER 10: When Angels and Venture Capitalists Are on.
CHAPTER 11: Devil in a Blue Suit: Spotting Frauds and Cheats.
PREPARING FOR A GLIMPSE OF HEAVEN.
CHAPTER 12: Why an Attorney Is an Absolute Must.
CHAPTER 13: Putting Together Your Advisory Board.
CHAPTER 14: The Poor, Misunderstood Business Plan.
CHAPTER 15: The All-Important Marketing Plan.
CHAPTER 16: Do Angels Put Any Credence in Business Plans?
CHAPTER 17: Polishing Your Pitch.
FINDING AN ANGEL.
CHAPTER 18: How Do Angels Find the Deals?
CHAPTER 19: Why Do Angels Band Together?
CHAPTER 20: Behind Closed Doors 189
CHAPTER 21: Tracking the Flight Path of Angels Is Difficult: TheyDon't Show Up on Radar.
CHAPTER 22: Making It Easy for an Angel to Find You.
YOU'VE FOUND AN ANGEL -
CHAPTER 23: To Invest or Not to Invest: That Is the Question.
CHAPTER 24: The Mystery of Valuation.
CHAPTER 25: Coming to Terms.
CHAPTER 26: Entrepreneurs Who Attracted Angels to TheirCompany.
LIVING WITH AN ANGEL.
CHAPTER 27: Advantages of an Angel Investing in a Company.
CHAPTER 28: Working with an Angel after the Close.
CHAPTER 29: Tales from the Venture Vault.
THE FUTURE OF ANGEL INVESTING.
CHAPTER 30: Making the Angel Investment Market MoreEfficient.
CHAPTER 31: Outlook: What a Wonderful World It Could Be.
APPENDIX: Experts Who Contributed to Attracting Capital fromAngels.
Posted April 20, 2003
'The complexity of business in economically demanding times makes finding constructive angels that much more challenging. The advice and tips in Attracting Capital from Angels are, therefore, invaluable. The wisdom offered here is not just for start-ups or neophytes, but is a well-timed companion to already existing resources and approaches to helping a business in all phases of development. It's also a great manual for people who want to share their knowledge (and invest capital) as an angel. I plan to recommend Attracting Capital from Angels to every entrepreneur I run into in the future who asks for mentoring sources. Great job!' (Bob Bozeman, General Partner, Angel Investors, LP)Was this review helpful? Yes NoThank you for your feedback. Report this reviewThank you, this review has been flagged.
Posted August 30, 2002
In over 35 years as a serial entrepreneur, investment banker and angel investor, I've come across dozens of books addressing various aspects of raising money, writing a business plan and/or finding investors. Most rehash existing theories and consolidate existing sources of research and advice on the topic. Brian and Dee have done a remarkable job of gathering fresh information through direct interviews, original essays and new surveys. The result is a truly enlightening, useful and very readable work which should become The Bible for anyone thinking of starting a business, financing an existing one, or investing as an angel themselves. A must read even for someone just interested in learning more about Angel Investing, a little known area of our economy which just happens to be one of the most powerful drivers of our free enterprise system. Bob Geras, President LaSalle Investments IncorporatedWas this review helpful? Yes NoThank you for your feedback. Report this reviewThank you, this review has been flagged.
Posted July 25, 2002
'Dee and Brian, the authors of 'Attracting Capital From Angels' have diligently researched and compiled a manual for all entrepreneurs seeking Angel funding and advice. While most books on Angels and venture capital focus on abstract concepts and financial theory, this one is directly relevant to real situations and contains invaluable tips to successfully secure funding for many ventures in a difficult environment.' Frank A. McGrew IVWas this review helpful? Yes NoThank you for your feedback. Report this reviewThank you, this review has been flagged.
Posted July 26, 2002
'I've just finished reading 'Attracting Capital From Angels' by Power & Hill and I immediately phoned our University bookstore. 'Attracting Capital From Angels: How their Money & Their Experience Can Help You Build a Successful Company' has just been added to their last tremendous book 'Inside Secrets to Venture Capital' as the two main texts for our MBA class in Venture Capital. These no-nonsense texts cut through the myth and hype about raising venture capital. They are clear and concise: powerful tools for raising funds that should never be more than an arms-length away from your business plan.' Dr. Bruce Borup Asst. Professor of Entrepreneurship Chair, Business Administration Department Alaska Pacific UniversityWas this review helpful? Yes NoThank you for your feedback. Report this reviewThank you, this review has been flagged.