Are you on a search for angel investors?

Angel investors are currently funding more small businesses than venture capitalists.  Because of this, many entrepreneurs search for an angel investor.

How much money can you get from an angel?

Angel investments usually range from $10,000 to over a million dollars.  If you are seeking several million and do not want to compete for venture capital, you will need to find a large angel network or a “superangel.”

Typically angel funding is done in the early stages of a company.  This is usually after the initial family, friends, and fools investment but before any venture capital rounds.  Sometimes angel investors provide bridge financing or fund companies still in the concept stage.  This type of angel investment is more unusual.

What needs to be done before meeting an investor?

First, you must create your pitch and a business plan.  The presentation should be relatively short, so that it only lasts approximately 20 minutes.  It should give a brief introduction to your product, the market space, management team, and marketing plan.   The necessary financials should show that you have thought in depth about expenses and how to generate revenue, but do not expect investors to believe all of your projections.  They may want to see several different scenarios and the time to profitability in each.  Depending on the amount of the investment and the resources available to them, they may create their own model to judge the feasibility of your projections. 

In the course of your presentation, you should outline your product, your market, your management team, and the reason you think your product will sell. You should practice the presentation in front of several people you trust for their good business sense and get their feedback.  First impressions are vital, and any time spent polishing the presentation is time well spent. 

Some experts recommend writing a business plan before the presentation, while others suggest the opposite.  Be sure your business plan is comprehensive and very well researched.  If you are raising significant amounts of money it is best to avoid business plan software because many times it leaves an entrepreneur appearing unintelligent or ill-prepared.  You may however find tips in books, Web sites, and software programs to make sure you include all pertinent sections.  When presenting on the road, you may want to draft a smaller document (perhaps 15-20 pages) to introduce the business to investors.  They will want a full business plan if they remain interested.

Where do you search for angel investors?

Keep in mind that many angel investors only fund local companies.  You should begin by talking to friends and using your contacts to find local angels.  Most investments are made by angel investors who are only one or two degrees of separation from the entrepreneur.  That said, there may be an investor not in your locale who you do not know with great knowledge or experience in the vertical market of your business.  By no means do you need to avoid such a person, but realize that distance and the unknown can present obstacles later.  If you are not getting traction through your network, contacting your local Chamber of Commerce or doing an angel investor search online may provide lists of angel groups.  These may provide further sources for funding. 

One such source is www.Invstor.com.  The Invstor.com Network provides a community with the mission of connecting investors to entrepreneurs.  For a small fee an entrepreneur can get access to the contact information for a large list of potential investors or post a request for funding in similar fashion as a targeted classified ad. 

Once you have found a potential investor, you need to get references and perform due diligence. The role of the investor in the daily operation of the company needs to be clearly defined to prevent future problems.  Some investors will want to function similar to a partner, while other will be difficult to reach after the deal is complete.  If you and the angel have differing expectations it could cause significant headaches and distraction from creating a successful business.

An angel investor is interested.  Now what?

Draft a Term Sheet and Determine a Valuation

If the angel remains interested in funding the company and is a good fit, a term sheet must be created.  Many times the angel investor will have his attorney draft one, though it is not a bad idea for the entrepreneur to do the same if sufficient resources are available.  Before the term sheet can be configured though, an initial approximate valuation of the company must be determined.  There are many formulas for this, but in the early stages when a company does not have a long history, the valuation is determined largely through negotiation alone.  It is the job of the entrepreneur to sell the idea behind the business and convince the angel investor it is worth some specified price.  The angel will argue that because of all the risks, the valuation should be presumably lower.  Keep in mind that if venture funding will be needed in the future, the stock holdings of both the entrepreneur and the angel will be diluted.

Sources: http://www.inc.com/articles/1998/12/18127.html