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Angel Investors

An angel investor is a person who invests his or her own money into private companies that are not owned by a friend or family member, in exchange for debt or equity from the company.

An angel investor network group is a formal, organized entity made up of many investors who work together to review companies, share and pool research and expertise, conduct due diligence, make group investments and often provide ongoing assistance and support to the companies in which they invest.

Research statistics indicate that about $25 billion dollars are invested annually by angel investors and groups. The way to get it is to submit to the right group and minimize the mistakes you make at each stage in the process. That’s what we help you do.

How many Angel Investors are there?

The number of individual business angels is very hard to calculate because many are occasional investors not affiliated with any state, regional or national association or angel group. While some are listed in an angel investor directory, not all angels are among those listed in any directory. Still, it has been recently estimated that there are at least 600,000 individuals in the U.S. who provide angel funding alone or as part of formal angel investor groups. However, as much as 35% of angel investors have made just one investment in their lives. Unless you personally know these people or can be directly introduced, your chances of funding from them are miniscule. Your best chances of angel funding come through submissions to organized groups.

Are all Angels wealthy?

No. In fact nearly one-third of them are in the lowest two-thirds of U.S. income brackets. However, most angel funding comes from the other 70% of angels and the highest dollar investments naturally come from the highest income or wealth investors. Professional angel investors are nearly always in the higher-income brackets because membership in most angel groups normally requires that members be accredited investors (net income of at least $200,000 per year or net wealth of at least $1,000,000) or at least capable of investing certain amounts of money into group investments.

Problems ensue for companies that fail to investigate angels or angel groups to determine what size opportunities they want to see. Companies seeking $250,000 of start-up financing are wasting their time asking for $10,000 loans from individual small-scale investors. At the same time, a company seeking $25,000 to buy a dry-cleaning franchise is probably wasting their time submitting to a business angel group that prefers opportunities starting at $50,000. Also, companies with low technology products or services for limited customers are wasting time submitting to angel groups seeking high technology businesses. Gauging the wealth of an individual angel is important to avoid wasting time, but wealth alone is not a good indicator of whether an angel or angel group is right for a particular company.

If you don’t know how to find the right groups to submit to, you are just wasting your time seeking the proverbial needle in the haystack. But if you do find the right angels, you can reduce the wasted time and pain of making dozens of submissions with little or no chance of success.

How many deals get done annually?

Recent research suggests that between 50,000 and 60,000 angel investments are made annually in the U.S. Angelsoft (http://www.angelsoft.com) is one of the largest statistical repositories tracking angel and venture capital investment. In a 12 month period the more than 400 angel groups reporting to Angelsoft may receive nearly 25,000 submissions from companies seeking angel funding. Of these, about 500 may be funded. By comparison, another angel investor network called the Angel Capital Association reports that in 2006, its 5,600 accredited business angels placed about $230 million dollars in about 500 companies.

What percentage of companies are funded by Angel Investors?

A small percentage of companies who submit to angels and angel groups are actually funded. Data from angel investor directory and research firm Angelsoft indicates that about 15% of companies make it through initial screening, 9% make it through the formal presentation, 6.5% make it through due diligence and 3% of submitting companies are actually funded.

We help entrepreneurs buck the trend and stand a better chance of making it through to the later stages in the process with each funding source. Think about this: 85% of companies never make it through the initial submission. Somewhere in the process they made critical errors that got them washed out. Just making it through that initial screening process increases your chances of getting funded tremendously! But it’s not an easy task and there are many chances in the angel funding process to mess up and get rejected. Even if a company makes it through initial screening, it stands a good chance of getting washed out during the formal presentation stage. About half the companies that pass initial screening by an angel investor network also pass through the formal presentation stage. So, once again, a company stands a 50-50 chance to move on and most who do not, suffered from critical mistakes or missing elements in their presentation or the way it was presented. Another 1/3rd of companies who make it through the presentation phase are rejected at the due diligence stage. They simply didn’t have their proverbial ducks in a row when business angels looked closely at the structure and viability of the company. The best way to make it through to the end-game is to make the fewest mistakes.

The GOOD NEWS is that you CAN avoid many of the mistakes and greatly reduce your chances of an early wash-out. Here is another way to look at your chances of winning with a particular angel group:

  • If you make an initial submission you have a 3% chance of being funded.
  • If you make it through initial screening you have a 20% chance of being funded.
  • If you make it through the presentation phase(s) you have a 33% change of being funded.
  • If you make it through due diligence you have nearly a 50% chance of being funded.

The longer you stay in the process the better your chances! We can help you minimize mistakes all along the way, greatly reducing the chances of rejection.

What is the average size of an Angel Group investment?

Data from angel investor directory and resource group, the Angel Capital Association, indicates that the average investment by an individual business angel as part of an angel group investment was about $30,000 in 2006. But the average investment made by investors operating within an angel investor network and investing together was about $250,000. Of course, each angel funding source is unique and funding can range from as little as $5,000 to as much as several million dollars. It is not uncommon for an angel group to share information with other groups when the amount sought is greater than the individual group typically provides.

Many companies incorrectly assume that if the amount of angel funding they are seeking exceeds the maximum typical investment parameters of an angel group, they needn’t submit to that group. Many other companies mess up later in the process by creating an investment structure that doesn’t justify the funding request, that doesn’t provide a defensible valuation or that doesn’t offer flexibility to angel investors.

The good news is that each of these mistakes can be avoided with careful planning and knowledge of the road ahead.

Do Angel Investors provide both debt and equity capital?

Yes. In fact statistics indicate that as much as 40% of the money business angels put into companies is in the form of unsecured business loans. Most often this is in the form of convertible notes, debt instruments that can be converted by the angel investors to shares of stock in the company for a given price per share over a given period. If the option to convert is not exercised, the company must repay the note with interest.

Companies often make the critical mistake of thinking that an angel investor network does not provide business financing. Because of this error in thinking, those companies often fail to provide a deal structure with enough flexibility. This is a good way to get washed out early in the process with many angel groups. Flexibility is a key factor in raising capital from angels.

However, with some good coaching and an understanding of the types of flexibility angel investors want to see in submissions and deal points, a company can minimize the risk of getting rejected early in the process--or worse--late in the process when the angel funding has almost been reeled in. Providing flexibility in the deal offered to investors is an art that, if mastered, can help you avoid an early washout.

What kinds of businesses get Angel investment?

Angel investors put money into all kinds of companies, whereas venture capital companies are far more likely to invest only in companies with valuable technology and large potential product markets. In fact, according to recent data as much as 25% of all angel investor dollars went into retail businesses and another 12.5% went into services companies. During the same time period, nearly 85% of all venture capital funding went into just four industries.

Must I have a business plan to receive Angel Investor funding?

No. Data suggests that as much as 35% of business angels in a recent year provided funding without reviewing a business plan. But don't get too excited. Most of those people made just one investment in their careers. Most are not accredited investors and most do not fall into the wealthy income brackets. Most of the investments made were in startups and the amounts invested were far below what professional angel investors provide.

So, if you have a pure startup business and you have access to individual angel investors, chances are about 35% that they'll provide funding without reviewing business plans. But if you have a going business--even if it is pre-revenue--and you plan to seek funding from professional grade angel investors, you absolutely, positively, must have a plan in place--one that contains valid use of funds, financials and return on investment information. And as we said above, the deal better have flexibility built in.

We can help your company create or make-over a business plan suited to the desires of angel funding sources. Review our Services page to find out how we can help.

Is my business ready for Angel Investor funding?

Every angel investor network has specific guidelines regarding the companies from which it is most interested in receiving submissions. Guidelines vary substantially from group to group. That’s why going in blind is a sure-fire way to fail. Angel investor networks have wide-ranging criteria to assess interest in and qualification of a company for angel funding. In fact, these groups vary widely in both the types of businesses they like and the potential a business needs to have to merit review. Recent data from an angel investor directory indicates that angel investor groups may require that a company can defend a projection of between $10 million and $100 million in revenues within five years. If you don’t know what revenue projection a particular group requires, you are wasting your time. A few angel investors will consider companies from across the U.S. and in many industries, but the large majority select companies regionally and within specific and limited industries. A great way to get rejected early on is to submit materials to groups who will not even consider your company based on its location or its industry or product category.

The bottom line (and this is Good News!) is that angel investor network groups have fairly clear guidelines that can quickly tell you whether your company is a good match. However, even if you appear to be a good match, but don’t know the details about how a group operates and how its process works, you’ll still often waste time and money in seeking angel funding. To see how we can assist your business to create a time, money and angst-saving funding strategy, please review our Services page.

What steps are involved in the Angel Investor Network process?

Every angel investor group has its own processes and procedures. However, most groups follow a process with at least six steps, more or less as follows:

  • Initial submission

At this stage the angel funding group reviews materials submitted by thousands of companies annually and determines which companies to give initial approval.

  • Initial conference or meeting

At this stage the angel investors group interviews the company and discusses any portions of the submissions materials that need to be upgraded for details.

  • Formal Presentation Meeting

This stage provides the company an opportunity to present before a large group of angel investor network members, many times there are fifty or more angels present.

  • Final Round, Regional or Dinner Meeting

This stage allows the angel investors to get to know the management team better, to ask questions and to gauge the readiness of the team for growth.

  • Due Diligence Period

During this period the business angel group checks the accuracy of all information provided by the company.

  • Negotiation of Term Sheet

At this stage the angel investors want to invest and are ready to negotiate the terms of their investment.

Contact CHI Consulting Group at 877-328-9179, Ext. 715. We can help you succeed at every step in the process!arn more!

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