From the entrepreneur’s standpoint, there are two major difficulties with obtaining angel financing: how to find the angels in their local community, and how to handle the negotiations.
Finding them is difficult because, in the past angel, investing has been done on an extremely informal basis. The entrepreneur’s company was referred to the angel through a mutual friend or business acquaintance. And angels do not seek publicity for their investment activities, for fear they will be overwhelmed with entrepreneurs seeking capital. There are no reliable directories of individual angels as there are for venture capital firms. For the entrepreneur, this means that the best way to find angel investing is through diligent networking in their local business community, attending events and letting people know that the company is seeking financing. Contacting angel networks, and participating in angel online matching services, both described below, are additional ways to meet angel investors.
It has often been stated that angels do not have as much expertise with negotiations, especially with establishing a value for the company’s equity, as venture capital firms might. They may not have standard contracts or terms to present to the entrepreneur. It is important that the entrepreneur has an experienced attorney to consult with during the negotiation process.
Angels are remarkable in that they invest in companies at the riskiest stage of all, before the company has reached enough milestones to be able to say with confidence it will survive, let alone become a thriving, valuable business. Experienced angels know that they will likely not make money with the majority of businesses they invest in. But finding a “winner” can mean extraordinarily high returns on their invested capital, along with the satisfaction of watching a company they assisted grow and become a force in the marketplace.
Angels want both types of “returns”: financial plus a feeling of making a positive contribution. Entrepreneurs who wish to entice angels into investing must make sure they appeal to both these needs.
It is a mistake to not view angels as professional investors. They did not become millionaires by making naïve investment decisions. Entrepreneurs approaching angels need to be as thoroughly prepared as they would when approaching “professional” venture capital firms.
Another mistake is believing that there is an angel investor for every conceivable business idea. A business that will never be able to do more than provide a good living for the owners is not a suitable candidate for angel investment. They seek companies that have a good chance of growing rapidly, gaining significant market share, and have barriers to competitive entry—pretty much the same thing venture capitalists look for.
Angels do not want to invest in a yogurt shop in the strip mall. Now if you came up with a new formula for yogurt that could be franchised, it might be a different story.