Monday, November 15, 2010

Angel Financing

For those of you who seek angel financing, here is additional information to guide you in your pursuit. It's not a how-to this time. It's more of an explanation.

Angel financing is NOT your friends and family. Friends and family are who you approach BEFORE you pursue angel financing. However, angel investors can come from or through your attorney, banker, CPA, fellow business group member or other business associates you know.

Your friends and family aren't as concerned about how your Buy-Sell Agreement is structured or about dilution of their shares. They typically want to help you and benefit in the process. You go to them sometimes before you even have your product or service market ready. They invest in YOU moreso than the company.

When you hear people speak of "Series A" or "Series C", it refers to the stage of financing. Angels do care about dilution. They are investing in YOU and the product or service. (Note that the management team is the MOST important concern. A great management team can build a good company with a so/so idea or product but a mediocre team with a great idea or product will usually crash and burn.) An angel investor is taking a risk and want to make sure his/her level of return is commensurate with that risk. So a "Series A" is the first round of angel financing (i.e., not your funds or your family or friends' funds). "Series B" will be the 2nd round of angel financing. By this time, you may have engaged venture capitalists. "Series C" is the 3rd round of financing, and this round is often venture capital or private equity, depending on the industry.

As each new round occurs, the equity is diluted. You may or may not have new investors in each round. Many angel investors, especially those with more sizable assets such as a fund or a group or a very wealthy individual, will inject additional funds into a venture that they like when they believe it is doing as well or better than they expected.

Keep in mind that if you need to raise hundreds of thousands of dollars and opt to pursue angel investors, you will need to give them a 30-50% return, depending on the stage of your company when you engage them. So you must intend to scale to a multi-million dollar company fairly rapidly. If you intend to raise millions, you obviously envision your company being worth $100 million or more sometime within the next 7-15 years. That's the only way you could give the angels the returns they seek.

But don't despair if you aren't in either category. If you only need to raise $100,000, then you can provide an expected return with revenues in the $500,000 - $1 million range in the next few years, assuming 20% or higher net profit margins.

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