Seed financing for start-ups was once an arcane pursuit, left to specialty investors. By the late 1990s, when this article was written, angel investing had become one of the hottest games in town for wealthy investors seeking rich returns and a more diversified portfolio. If you need start-up money for a note business, it helps to understand who angels are and what they look for.
Who angel investors are
Many angels are people who built their own companies, cashed out and now want the vicarious experience, as well as the returns, that come from helping start-ups.
David Gladstone, then chairman of American Capital Strategies and a longtime venture capital investor, said money had become so plentiful that an impressive team of entrepreneurs with a great idea could probably find financing. “The 1990s will probably be known as the decade of the entrepreneur.”
Gladstone organized the most prominent angel group in the Washington region, the Capital Investors. Its 20 members included business and technology leaders such as Steve Case of America Online, John Sidgmore of MCI WorldCom and Marc Andreessen, founder of Netscape Communications. They met for dinner and heard 15-minute pitches from entrepreneurs, and had invested in a handful of companies in the greater Washington region.
How big and scattered the angel market is
Angels are not limited to prominent business people. At the time of writing, the Small Business Administration estimated that about 250,000 angels invested $20 billion a year in more than 30,000 companies, and the figure was likely growing with the money pouring into internet and technology start-ups.
It’s a fragmented market without a good way to match angels and entrepreneurs. “This is the last frontier of the financing chain,” said David Amis, founder of Amis Ventures in Washington, D.C. He estimated that 200 to 300 services tried to match investors with entrepreneurs, with varying success. There are also regional investing clubs, where angels may put in as little as $25,000.
Amis and Gladstone spoke at a meeting on the mechanics of angel investing sponsored by the Harvard Business School Club in Washington, where several companies also pitched. Attendance was thin compared with large venture capital fairs, but the event showed where private investing was heading: downmarket, giving wealthy individuals more chances to get in at the seed stage and share in the rewards if the company grows and goes public or is sold.
When start-ups turn to angels
Start-ups that seek out angels have typically spent the $50,000 or $100,000 raised from family and friends and are looking for the next $250,000 to $700,000 to prove their concept. A company burning through $50,000 to $100,000 a month has only a small window to do so.
Besides money, angels bring two things in short supply: expertise and credibility. That matters when a company looks for later rounds of financing. “The most important thing is to find the right partners,” said Jeff Tonkel of the Capital Investors.
What venture capitalists check next
Harry Weller of FBR Technology Partners, a venture capital fund, said, “If you can get in front of those super-angels, obviously it will get our attention.” Venture capitalists look at whether a company has met its milestones. Weller said he often goes back to the original business plan to see whether the company achieved what it set out to do.
Venture capitalists also try to minimize risk. They look at three things:
- The product: is it doable?
- The market: when will demand hit?
- Execution: can this management team pull it off?
If they like what they see, find the market attractive and believe in the team, they may provide the next several million dollars needed to ramp up a product and get it to market.
