Angels:  Capital Source for Promising Entrepreneurs

by Marianne Hudson

It comes as a surprise to many how important angel investors have become to start-up companies and our entrepreneurial economy.

One expert estimates that angels—wealthy individuals who make equity investments directly into new ventures—invested $25.6 billion in 51,000 deals across the United States in 2006. The Kauffman Foundation estimates that angels may provide up to 90 percent of the outside equity, after friends and family, to early-stage companies.

Kansas City is part of this picture. While we don’t know the exact numbers, it appears that there are hundreds of angel investors in the community who have been investing in a wide variety of innovative companies.

If you’re thinking about starting an innovative business, here are a few things you should know:

•     Work with a business advisor to help you determine the right type of capital to help you meet your dreams for your business and then to prepare the best possible business plan and presentation materials that will attract the interest of these investors. Angel investing — in which the investors own a portion of your company and have a say in business decisions—is right for some companies, but not for others.

•     Read as much as possible about angels and how they operate. There are a growing number of books, articles and Web sites that can get you started. It is important to understand everything from the general criteria for investment to the process for making decisions to average deal terms.

•     Develop a plan that has great possibility for growth in a short time period, and make sure you have the team that can turn the plan into reality. Every angel and deal is different, but some terrific angels tell me they are looking for companies that can reach $15 million in revenue within five years and that address markets of $500 million or more. They will also want to know that the company has potential customers for the product, if it is still in development. More than anything, they are looking for a team that has the know-how, passion, and commitment (including the investment of your own resources) to grow the company.

•     To find the right angel, meet as many people in the community as you can, as this networking will eventually get you an introduction to the right person—they will know someone, who has a friend, who knows someone, who will refer you to an angel. Go to events such as venture forums, not only to meet investors, but also to see how the entrepreneurs pitching their businesses do it and how they interact with investors. Talk to your attorney, accountant, banker, or business coach to get their suggestions on people to meet—after getting their help on crafting your business plan to ensure you have a business opportunity that is truly ready for equity investment. Call or email people you have read about when equity deals are publicized.

•     Learn more about the angel group in the community. In Kansas City, that group is the Mid-America Angels (www.midamericaangels.com), which has nearly 60 member angels and has invested in 7 companies in their first year of operation. Take the time to read their Web site to understand the group’s investment preferences and processes. Before you blindly send them a business plan, use your networking capabilities to get an introduction to one of their members. You’ll have the best luck if you’re referred to an angel group by someone they already know and trust.

•     If you are asked to make a presentation to an angel or group, make sure you understand their format. For instance, they may have a time limit of 15 minutes for an initial presentation and want you to cover specific topics in ten slides. This presentation is critical—they want to see how knowledgeable and passionate you are, particularly through questions that can often be difficult to answer. They are also looking for integrity, so if you don’t know the answer

to a question, be honest about that and get the answer back to them later after you’ve had the time to look into their issue.

Working with angel investors can be a terrific opportunity for high potential start-up companies. Some great companies got started with not just angel money, but also great mentoring and advice from angels who were entrepreneurs themselves and understand your journey.

Marianne Hudson is Executive Director, Angel Capital Education Foundation.
P | 913.894.4700
E | mhudson@angelcapitalassociation.org