Friday, March 4, 2011

Lesson #5: Finding Angel Investors for Your Startup

As we read in my previous post about fund raising options for your business, angel investors (not venture capital firms) are the most likely candidates to get your businesses from a piece of paper to a proof of concept.  Today, we will tackle how do you find these angel investors across four distinct groups: (i) friends and family; (ii) angel investors directly; (iii) networks aggregating monies of angels investors; and (iv) fund raising advisors.

Friends and family investors have their distinct plusses and minuses.  The plusses are these people know you the best, so they are the closest to you in determining whether or not you are backable, as first hand references.  The minuses are pretty major:  these are your friends and family!  It is very difficult to mix personal and professional relationships.  And, as we know, only one in 10 startups is successful.  So, there are very high odds you lose all the money invested by your closest friends and family, which will make for VERY awkward Thanksgiving dinners from that point on.  So, if you decide to ultimately go down this road (which for many startups are their only option), make sure your friends and family know this investment is HIGHLY risky, and they should not invest the funds unless they are prepared to lose 100% of their investment (e.g., like money they would gamble in a casino).

As for finding angel investors directly, this by far is the hardest route.  First, because they prefer to stay anonymous.  And, second, because they don't know you at all.  Sometimes rich individuals have built formal family investment offices, with professional managers screening deals for them.  But, I have found, if they can afford a family office, they prefer to invest $5MM+ in more typical venture investments, not $500K for a startup.  Preferably, you need to find an individual that understands your industry and business model and can bring real value to the table, understands your needs and is easier for them to get over the investment hurdle.

So, for example, if you think you have the next great video gaming technology, I would research what similar video game technologies have recently been sold (meaning the founder just got very cash rich), and reach out to that founder to tap into their expertise as an advisor, board member or investor.  Notice I didn't lead with investor.  You need to establish credibility with this individual before jumping into the investment question.  And, if he doesn't want to invest, he may know others in the industry that would, so ask him for references.  Venture capital firms are also aware of key angels in their market, so reach out to them for guidance.  There is a great website called Angel List that makes finding angels for your region/industry easier than ever, so check them out as a good place to start.

This last category, is my favorite category: networks aggregating angel investors.  Like the family offices, investors set aside funds for angel investments, screened by a professional team that sources deals for the network.  So, the individual angel gets to keep their anonimity and have the comfort of a team of smart managers doing due diligence on investment targets, on their behalf.  So, instead of one angel investing $1MM by themself, 100 angels aggregate $100MM and invest as a group in the deals they like the best, individually or collectively.

Here in Chicago, the big three angel networks are Hyde Park Angels, Cornerstone Angels and Heartland Angels.  These angel networks very much prefer to invest in their own backyard.  So, if you live in Chicago, reach out to these three.  If you live in another city, you will need to research who the angel networks are in or near that city.  I stumbled on this great list of angel networks by city compiled by Andy Whitman, a Partner at 2x Partners, an early stage venture capital firm in Chicago with expertise in the CPG space.  This list applies to all industries, not just CPG, although Andy does indicate what CPG deals these networks have invested in.

If all of the above fails, you should consider engaging a boutique start-up fund raising advisor.  The problem with this road is raising funds via this channel can be more expensive, with the advisor typically taking a 5%-7% success fee in cash, plus a 5%-7% success fee in warrants, and often times, plus a monthly retainer to cover their costs.  As an example, Red Rocket takes a 5% success fee in cash, plus 5% warrants (without charging a monthly retainer), for stories we believe are fundable from our network of investor relationships.

Hopefully, this information helped to make the angel identification process "less scary", knowing there are viable angel investor options which can be pursued.  And, over time, expect more and more angels to get more active in early stage investing as a core part of their portfolios (as a way to exceed the returns in the stock market and fill the void left by venture capitalists who have gone out of business).  Good luck!

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2 comments:

john said...

George,

Nice post, I especially like the friends and family plusses and minuses and the reminder that they may lose everything!

Don't forget Angels also appear in the form of your accountants, bankers, vendors and anybody else that knows you. Don't be afraid to look beyond one single investor to raise the capital needed to start your venture. You may be better off raising a little bit of money from multiple investors than all of the money from one investor so that you don't lose control of your company!

George Deeb said...

Completely agreed, John. Nice addition! And, good point on making multiple calls, for a second reason. Need to make 20 calls just to get one to seriously look at your story.