ANGEL INVESTORS

Question:

I have a great idea for a new product but do not have the money to produce it.  Banks have turned me down since they do not loan to startup companies without money or collateral. I have heard of investors called “Angel Investors” and would like to know how to find them.  Also, what do they need to know before investing in my company and what do they get in return.

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Angel investors are individuals or groups that are willing to take a risk with companies that they feel will be successful in exchange for a high rate of return.  The amount invested can be several thousands of dollars to a million.  Beyond that point you're in low venture-capital territory.

The SBA (US Small Business Administration) estimates that there are around 250,000 angels in the U.S., funding about 30,000 companies a year. So, how do you hook up with one? Try a search on the Internet using key words, such as “Angel Investor” and you will get many links to venture lending organizations.  Make certain you are dealing with reputable groups and individuals.  A good web site to start with is NewYorkInvestmentNetwork.com.

Friends and family have often been the source of funds for startup companies.  Dealing with friends and family require special care as not to destroy longstanding relationships. Treat your dealings with them on a business like fashion to avoid any misunderstandings later on.

Some well-known and successful companies starting their business with Angel Capital are Google, Amazon, Apple, Kinko and Starbucks. When you solicit funds from the public you should be aware that securities law requires a prospectus or some other form of offering document be prepared when promoting an investment, unless certain exemptions from those requirements are applicable. You should obtain qualified professional advice in order to understand what the implications are in your particular circumstances.

Your business plan should be a convincing one and you should have working models and samples of your product for potential investors to examine.  At SCORE we have found that no one formula in dealing with Angel investors is the correct one. Each participant has emotional, and financial needs which they will satisfy by having a meeting of the minds as to price and return provided. Most investors are looking for a ROI (Return on Investment) as high as they can get, but in reality it is in the 20% to 35% cash on cash returns, depending on payback terms (maximum of 5 years), industry trends, stage of product development, and round of funding.  Deals are usually structured with other equity kickers (warrants and options), which may be held for longer term that the cash payouts, so overall the ROI is higher but just the cash on cash is in the 20% to 35% range.  Sometimes Angels protect themselves by proposing some form of convertible debenture where they are essentially loaning the company the money so if things don't go well they will want their money back and if they do go well they will convert to equity.