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More Is Better

The expression “Don’t put all your eggs in one basket” holds particularly true when you start looking for an angel investor. Having multiple parties interested in your business makes it more attractive to investors and gives you leverage when negotiating the terms of the deal. Cast your net wide and look for a number of individual angels and angel groups simultaneously.

Ten years ago, tracking down an angel investor was difficult if you didn’t live in the Silicon Valley or Boston’s Route 128 corridor. Even in those locations, it was a case of “who you knew” through business or social connections that led to finding an angel. Today, the angel investor universe is more mature and structured. There are active angels across the U.S. in communities of all sizes, from Chippewa Valley to Chicago. If you have a good concept—and a willingness to do a little research—you can find an angel.

But finding the right angel is as important as finding an angel. It helps to know what to look for when angel hunting. As you begin your search, the first thing to look for is an angel with sufficient funds to invest in a relatively high-risk venture (as any new business is). But money isn’t everything. Most angels invest only in local companies, and you’ll need to have a number of face-to-face meetings both while trying to secure funding and once you have an investor. So look for angels who are geographically nearby. Next, seek angels who come from the industry in which your business is operating. Angels who have worked in your industry are valuable because they offer firsthand experience and expertise that you can use. Since they are already well networked, they can provide introductions to potential customers, partners, vendors, and suppliers. They’re also more likely to understand your business concept and its potential.

Who Can Invest

in My Company?

Before approaching an angel, you’ll need to determine whether they have enough money to invest in your company—and, just as important—whether they can afford to lose it. Imagine if you were depending on an infusion of cash to start manufacturing your first product or to launch your website and your angel couldn’t come up with the promised funds. All your hard work, and your company, could go down the drain.

One way to reassure yourself about a potential investor’s financial condition is to determine whether they meet established accreditation criteria. This means they fit certain categories outlined by the U.S. Securities and Exchange Commission (SEC). The SEC defines an accredited investor as one whose individual net worth, or joint net worth with a spouse, is in excess of $1 million, or one whose income has exceeded $200,000 in the past two years or whose joint income with a spouse was more than $300,000 in the past two years—and who has a reasonable expectation of reaching the same income level in the current year.

In some cases, especially if you are raising many millions of dollars, many of your investors will have to meet the SEC’s criteria of being “accredited investors.” Only your attorney, one who is experienced in securities law, can advise you on this. For more information on SEC accreditation, including who is exempt from the definition, visit www.sec.gov/answers/accred.htm.

While the SEC’s definition of “accredited investor” is still in use, it dates back many years and experts argue that a more realistic evaluation of a person who can afford to lose money by investing in new ventures would put the net worth of the average angel in the $3 million–to–$5 million range.

Your angel investor may not fit the SEC criteria but may still be a good bet. Your rich Uncle Bob, for example, may not be worth $1 million, but he might have extra money; be willing to risk it on you, his favorite relative; and believe in you and your business idea.

It’s not always easy to find out about an angel investor’s financial status. Do what you can to reassure yourself. See page 38 for more on how to conduct “due diligence” on potential investors.