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Angel Investor Financing for Small Businesses

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Angel investors are individuals who personally invest directly in a business. Often, they invest in early stage business. The term "angels" comes from investors who used to provide money to salvage a theatrical production that otherwise might not have had the backing to open. Traditionally, angels are successful high net worth individuals who are looking to get involved on the ground floor of a growing business for any of several reasons: from an opportunity to use their years of expertise, to tax benefits, to shrewd investment opportunities. As more wealth has been accumulated by a younger segment of the population over the past decade, angels are now also young investors seeking out the next innovative idea to get behind.

It is estimated that over $20 billion is invested in start up or young growing companies by angel investors.

The typical angel investor:

  • Is well-educated
  • Invests in an area of personal interest or within an industry they are or have been associated
  • Does not get involved in the daily routine and operations of the business
  • Makes an average investment of anywhere from $10,000 to $250,000
  • Looks for companies that have large growth potential

    Angel investors — once thought to invest more often on whims or based on their personal impression of a business or of the individual behind it — are now exercising greater due diligence. They look for a sound business plan that clearly demonstrates how the business will work. Additionally, they want to be convinced that the management will be able to implement the plan. While angels are typically more patient than lenders, they want to know how soon the business will be able to see a profit. Generally, they do not want to be the only source of funding and want to know where future investment capital is likely to come from.

    A meeting with an angel investor should take place in person. You should be ready with written material — business plans, projections, etc — and be prepared to answer tough questions. Angel investors want to see that you:

  • Have done your homework and researched the industry thoroughly
  • Stand firmly behind your business plan and goals
  • Have thought through all aspects of the business from a practical aspect
  • Have an experienced management team

    Being prepared for meeting with an angel investor requires more than just knowing your business plan. Due diligence on your part is necessary vis-a-vis the angel. Find out what you can about this investor’s background, interests, and past investments. You should always know something about the person from whom you are requesting money. A personal rapport can be a key part of the success of the relationship.

    Although you want an angel to invest money, you also need to establish what the business arrangement will include. Traditionally angel investors were often silent backers putting money into a project that they believed in but having little to do with the business beyond making their investment. Today, however, you will find angels who want to be involved in all key decisions and those who will provide guidance and expertise from afar. From the onset, you need to establish the amount of involvement the angel investor wants in the management decisions and operations of the business.

    Finding Angel Investors

    For years it was typically through friends and business associates that one would need to network in order to find the name of angel investors. Such investors kept a particularly low profile. Today, however, angels have in some cases joined together to form groups and are also listed with business and investment organizations. Individually, angel investors still fly below the radar, but in newly formed groups they are more accessible than in the past — many now having a Web presence including posted guidelines telling entrepreneurs what types of businesses they are interested in backing and how to best go about reaching them. Unlike venture capitalists, who invest money from a variety of other sources, the angels in an investor group invest their own money. Angel investors may be inclined to fund very early stage companies and to take greater risks.

    According to an angel network activity survey, conducted by ChangeWave Research Services active angel groups, on an average, include up to 85 members who seek a 35% return on their investment. In addition, angel groups typically invest between $2 million to $5 million per year and have invested an average of $9.5 million in start-up companies since their inception.

    The Internet has been particularly helpful in linking new business owners up with such groups. Some websites, such as nextwavestocks.com, feature links to a variety of angel investors located throughout the country. Angel investors are often more likely to invest in business ventures in their state or region of the country, and in many cases they focus on specific areas.

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