Start-up Entrepreneurs' Blog

Looking for Start-Up Funding? Where Are Angel Investors Hiding?

January 14, 2010

So where are the private investors and angels investors hiding?  Many people are proposing countless ideas for new start-up companies. All of them are seeking funding. It’s much like the great Easter egg hunt, but instead of eggs everyone is looking for money. My personal survey at start-up events shows about half of the entrepreneurs say they are self-funded or are bootstrapping their companies. I recently attended a string of angel investments meetings and would like to share some comments on the state of angel investing along with some observations.

Today’s Statistics on Angel Funding

Angel groups are currently receiving 50 business proposals each month.  After review, only about 6 of these proposals are deemed worthy of further review and only 3 will be chosen to give a presentation before the group. Angel groups are only funding 1% of these proposals and most groups funded 5 or 6 start-ups in 2009. The deals were equally split between funding new start-up companies and later rounds for existing companies.  In a seed round, angels invest around $300,000 and want a 25% to 30% stake in the company. It’s rare to get angels to invest upwards of $1 million or more in a funding round.  The translation is an angel-backed company cannot require mega bucks to reach its fruition. If the start-up thinks it will require a total of $50 million in funding, the angel investment will be worth little in the end.  Most angels are looking for an estimated total investment of $3 million.

One of the questions most frequently asked is how long does it take to get funding. Realistically, it can be 3 or 4 months from initial contact to getting cash in the bank.  An entrepreneur may have to contact a lot of potential investors to find funding.

One start-up raised $4.7 million dollars from private investors over a 3 year period. This is not a typical amount and they were still 2 years away from market availability of their software product. The CEO confided in me that he was exhausted from the constant fund raising effort.

What Motivates and Scares Angels

The biggest motivation for angels is profit. Angels want to make money. Start-ups are a very risky business and it has to return far more than just buying and holding publicly traded stock. The biggest fear for angels is to have their investment significantly diluted  in later rounds of funding.

What Angel Investors Look For In A Start-Up

Every angel and venture capitalist will tell entrepreneurs their ideal team is serial entrepreneurs that have industry experience in the proposed market segment, and at least one of their previous start-ups ended in great profit for the investors. Preferably the team already has two key players, marketing and technical, both of which should be experienced at the senior level.  A single person team won’t get funded as one person is not a team at all. Angels also have a notion of what types of companies they will and will not invest in. They don’t like retail and they don’t like service companies. The reality is that none of this will stand up to the lure of profit. There are plenty of angel-backed deals where the founding teams are 20-something entrepreneurs and they are about as far away from the ideal as you can imagine. So what do you do if you don’t have this dream team? You find advisors willing to mentor the company.  An advisory board not only brings experience to the start-up with their knowledge of the nuances and hurdles of the business, but they also lend credibility to the start-up. And credibility matters a great deal to angels.

So what makes the deal compelling to an angel group? The best deal today for an angel group is one where the startup has a proven business model with revenue and customers.  The ideal start-up needs funding to scale and expand its operation. On my personal survey at start-up events, about one-third of start-ups publicly presenting their companies to investors have customers and/or revenue.

Who Are The Angels

The funding process is a sales process, and like any sales call, it is important to understand the perspective of the potential customer. Most of the angel investors are not wealthy individuals, most are successful professionals and local business owners. Their net worth has been dramatically affected by the economic downturn. One angel investor has seen revenue at his local business fall over 50% last year and his local business is struggling. All that is required for someone to be an angel investor is to be an accredited individual by the definition of the Securities and Exchange Commission – $1 million in net worth and an annual income of $200,000. Now put that profile of an accredited investor in perspective with typical angel funding of about $300,000 in a startup and you can see why so few start-ups are being funded by any one angel group.

The SBA reported the angel investment community provides more funding for start-ups than the venture capital community.  It should also be noted that the average angel group loses money. As one angel said to me recently, angels groups are very much social organizations with the common thread being investing.

When Not To Present To An Angel Group

Some groups ask for some small, nominal fee to present at their meetings. There are others that are pay-to-play angel and investment groups and these can ask $5,000 to $25,000 for a start-up to present – and the odds are that the start-up won’t get funded. Unless you’re an already well-funded start-up, an entrepreneur should stay away from these pay-to-play schemes.  Honestly, shouldn’t investors be making their money from the returns on the start-up flourishing rather than on fees charged to the start-ups seeking funding? It’s like McDonalds asking job applicants for $5 just to apply to work at the fast food restaurant.

It’s not easy to raise funds for a company, but then again, it never has been easy.  Competition is fierce for attention. Business models need to be well honed. Start-ups are not only competing with other companies in their markets, but they are competing with every other start-up for funding.  The good news is the angel investors are still out there.

Filed under: Start Up Funding

Tags: angel funding, angel investment, business financing, high tech startups, new business, Start Up Funding