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What it takes to woo an angel investor

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Highlights
  • Angels are private investors who organize as groups of individuals or as networks.
  • Most investments are made within a half-day's travel from the angels' homes.
  • Some angels may have a "pay to play" policy for entrepreneurs.

Angel investors don't come with a halo and wings, but they can seem heaven-sent to an entrepreneur struggling to find financing.

The term comes from the wealthy patrons who finance Broadway plays, but the same kind of financial assistance goes back centuries. "Even Christopher Columbus was backed by an angel," says Marianne Hudson, executive director of the Angel Capital Association, or ACA, a trade association of angel investor groups.

Today's angels are private investors who are typically organized in one of two ways to dole out initial investments to entrepreneurs. An alliance is a group of solo angel investors who make decisions individually about which projects to back. On the other hand, investors in an angel fund pool their money and a majority of the group must approve the investment.

Before any money changes hands, expect to spend three to six months in the multistep process, which includes the application, prescreening, screening, the investment meeting and due diligence. Some angels may have a "pay to play" policy for entrepreneurs, but these fees should be no more than a few hundred dollars for applications and no more than $500 for presentations, according to the ACA.

This may be a good time to approach an angel. The angel investor market rebounded last year, according to the 2010 Angel Market Analysis by the Center for Venture Research at the University of New Hampshire. Total angel investments increased 14 percent over 2009, indicating that angels have significantly increased their investment activity, says Jeffrey Sohl, the center's director. So if you've maxed out your credit cards and decimated your savings to finance your startup, angels might be the answer. Here's how to get them on your side.

Stay local

The Center for Venture Research found that 90 percent of angel investments were made within a half-day's travel time from the investors' homes. The websites of the ACA and its affiliate, the Angel Capital Education Foundation, have angel listings by region. Once you've identified the angel networks in your area, check their websites for deal criteria and details about their process. Another model is the Open Angel Forum, which holds free pitch events in various cities. Preselected entrepreneurs are brought together with 20 to 30 angels.

Have the right business

Angels are looking for highly scalable growth companies, says Tim Weelborg, executive director of the Enterprise Institute based in Brookings, S.D. They want to see the potential for fast growth in value and sales. This means so-called lifestyle businesses, such as retail shops or corner delis, usually won't get funding.

It's important to show you can compete in a global marketplace. They also want to see a strong management team who can achieve these goals. "We hear that investors invest in the team more than the idea or the project," Weelborg says. Clearly describe your team's qualifications to do their jobs. "They have to be confident that the management team can execute the business plan," Weelborg says.

Give up some control

"Think about whether equity capital is right for you," Hudson says. "Are you willing to have someone else own part of your company and have a say in strategic decisions?"

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