Angel Investing

For simplicity, angel investing is any investing that is not for one of the purposes listed above. Angels invest in businesses, individuals or even just an idea. The scope of investments is limitless. One common characteristic of an angel investment is it rarely involves a short-term, one-time sale.

The word “angel” investor came originally from wealthy investors to Broadway stage productions that banks and other financial institutions would not finance due to perceived unmanageable risks. The productions would run several weeks to a year or more, depending on its success.

It is through that period of the production run the angel investor earns income that eventually repays, hopefully with a profit. Once the production shuts down, the investment period is over.

Thus, angels typically take on much more risk than a banker. For that risk, angels require a much higher return rate on investment. Not all businesses can promise a high rate of return, so are not suitable for angel investing. Not all businesses are long term, either.

For instance, a company may be founded to promote the Olympics for a specific country. That company may be involved in events planning, marketing initiatives, any number of services. There could be sizable income generated in executing contracts and order fulfillment related to promoting events and services in and around the Olympics. But, that business as a concern essentially comes to an end when the Olympics ends.

This may be a reasonable type of short- to medium-term investment for an angel investor; and one that a bank may not finance due to the short-term and high risk nature of the investment.

But, angel investing involves dealing with businesses that have much less transparency than publicly traded companies, and higher risk than with businesses that have tangible assets like gold or real estate.

Jeff Hamilton’s paper on angel investing gives a much more thorough discussion on how to make angel investing more transparent, in order to be more successful, and is available here at the Technology Leadership website as an instant download: Knowing When Angel Investing is Good for Investor and Business Alike

Your business plan continued

Your marketing plan
ß overall strategy
ß pricing
ß advertising
ß promotion
ß distribution

Design and development plans
ß product/service improvement
ß new products/services

Manufacturing and operations plans
ß geographic location
ß facilities
ß capacity improvements

Management team
ß organization overview
ß biographies
ß compensation plans for key employees

Financial plan
ß tax returns
ß profit and loss forecasts
ß pro forma cash flow analysis
ß balance sheets
ß 5-year projections

Proposed company offering
ß desired financing
ß securities offering
ß capitalization
ß timetable

All of these elements in your business plan are important, but there is more to dealing with a prospective angel investor than handing them a huge stack of papers.

Most of all, take your time in forming a relationship with an angel. You are going to be spending a number of years together at a critical time in your business’ life.

Therefore, it is crucial that you take the time to assure yourself that this is a person whom you are comfortable with not only during the ‘honeymoon phase’ of the relationship, but will be able to work with  through both the ups and downs the future will inevitably bring.

Angel Investors 7

Your business plan

Before you approach an angel, your business plan should include:

An executive summary
ß description of the business
ß opportunity and strategy
ß target market
ß projections
ß competitive advantages

The industry’s prospects
ß Statistics for previous years
ß Forecasts and projections

The company and its products and services
ß entry strategies
ß growth strategies

Market research and analysis
ß customers
ß market size
ß market trends
ß competition
ß estimated market share
ß estimated sales

The economics of the business
ß gross margins
ß operating margins
ß break-even analysis

What Angels Expect continued

In order to protect their investment, angels often ask the business to agree to not take certain actions without the angel investor’s approval.

These include:

ß Selling all or substantially all of the company’s assets

ß Issuing additional stock to existing management

ß Selling stock below prices paid by the investors

ß Creating classes of stock with liquidation preferences or other rights senior to the angel’s class of security.

Angels also often ask for price protection, that is, anti-dilution provisions that will result in their receiving more stock should the business issue stock at a lower price than that paid by the angels.

Getting ready to approach an angel

To prepare to solicit an angel, several critical factors will aid in making the approach successful.

First, assemble an advisory board that includes a securities accountant and an attorney.

Two important functions of the board are to recommend angels to contact, and to work with the management team to develop a business plan to present to the angel.

The business plan itself should define the reason for financing, how the capital will be spent, and the timetable for going public or seeking venture capital funding.

In our next section, we will discuss the essential aspects of your business plan which need to be included prior to approaching an angel.