So you have a business that is beyond the bootstrap phase, and you may have even raised some capital from friends and family. Hopefully if you have raised money from friends and family it is in the form of a note, or worst case, some convertible debt. Hopefully you don’t have any odd equity structures that could be a hindrance or even a showstopper for getting outside investment. Let’s say you’re past all of that.
You want to raise $500,000 to $1,000,000, maybe even a little more. You’ve heard that Angel investment is the way to go, and you want to know how to find these so-called Angel investors. Here are some key things to consider:
Know the Difference between “Smart Money” and “Dumb Money” Investors
Before you even start to look for Angel investors, it is important to think through what you want from your investors besides money. In my experience, it is always preferred to get “smart money” investors, as opposed to “dumb money” investors.
The term Smart Money comes from gambling, where a bet is placed by experienced gamblers or those having privileged information. Implicit in this definition is that the Smart Money investor has a track record of success in investing. Investopedia characterized Smart Money investors as those that are “…experienced, well-informed, ‘in-the-know’ or all three.”
In my personal experience, the best investors in your company are experienced investors with a track record, that have significant domain expertise in your vertical market, and ideally a Rolodex of contacts that can be potential customers, strategic partners, and suppliers. They also have a reputation as someone that other investors like to follow, based on their knowledge and track record of success. See my article Smart Money Startups – Why is it Important?
As an alternative to Angel investment, Crowdfunding may be an appropriate source of capital for some businesses. Crowdfunding is the process of raising money to fund what is typically a project or business venture through many donors using an online platform, such as Kickstarter, Indiegogo and Crowdfunder. If you make a decision to raise equity capital using a crowdfunding campaign based on the recent JOBS Act legislation, it is important that you understand the legal risks. Check out my video, The JOBS Act Demystified. From what I’ve seen to-date, raising $500,000 to $1,000,000 using crowdfunding may not be advisable. On the other hand, raising money using Regulation A+ may make a lot of sense. Finding syndicates of Angel investors can be very important.
Develop a “Target List” of Angel Investors for Your Business
When fund raising from Angel investors or venture capital firms, in the case of later stages of financing, I am a proponent of a “rifle” approach, versus a “shot gun”. There is no substitute for doing your homework, defining a target list, and making a concerted effort of getting the smartest money possible into your deal.
The “old school” approach to finding a group of high net worth individuals that make Angel investments does still work. It is all about networking. In my experience, a great source of leads can be in your corporate service provider network. This includes:
- partners in large accounting firms
- corporate commercial real estate brokers
- corporate insurance brokers
- corporate attorneys
Other good sources of leads can be:
- industry trade groups
- the local chamber of commerce
- university alumni lists
- the local business press
It is always best to get a personal introduction, and LinkedIn can be a good source to see if you know someone who knows someone.
Attending industry events, trade shows, and seminars can also be a good source of leads. You need to be a networking “animal” to get good results here, but I’ve seen it done. Know what you want and plan your path to find it!
Use the Internet as a Resource
With the Internet, there are now tons of resources available for identifying Angel investors. There are Angel investor groups organized in different geographies around the United States. Two prominent Angel groups in Southern California are Tech Coast Angels and Band of Angels. You can also use the directory of the Angel Capital Association to find Angel groups around the country. Entrepreneur Magazine recently released a list of the Top 10 Angel Investor Groups.
Angel’s List is a good source of active Angel investors, and even a source of getting a syndicate of Angel investors into your deal. The carry on some of these syndicated deals can be quite expensive, so keep this in mind when going this route. I’m on Angel’s List and I’ve found that it is a good source of deal flow and ideas. MicroVenture, Funding Post, Keiretsu Forum, Tracxn and Angel’s Den are other sources of introductions to Angel investors and venture capitalists. Again, look at the cost of the money being raised as a consideration when using these routes. Yet another source of leads is the US Small Business Administration – Office of Advocacy. Crunchbase and Mattermark are the gold standards for finding data about startups. I personally prefer Crunchbase and it is exclusively focused on the world of startups.
Use Seasoned Experts as Advisors and Coaches
If you need help, there are consulting services and a number of fund raising advisors here to help. For example, a colleague and friend of mine, J.D. Davids runs the Fronis Group, and they do free Webinars and seminars under the Smart Money Startups brand.
Consultants vary in price, and they can do anything from helping you with your business plan and pitch deck to helping you build a target list of investors. They typically work on a per-project or hourly basis, or on a milestone-based payment schedule. Financial advisors typically work on a success fee basis, and will charge 5 to 7 percent of the deal proceeds, plus warrants in the deal.
Both consultants and funding advisors typically charge for their out-of-pocket costs and travel, and typically require a retainer. There are specific SEC rules around funding advisors, and it is important that you understand these as an entrepreneur before you retain one. If you don’t do it the right way, you could run into situations where you have to give the money back or your stock might not be able to be registered. QuestFusion clients fully understand how to do it right the first time. And remember, you only have one chance to make a first impression.
Focus Your Efforts on Where Venture Investors Located Geographically
The “center of gravity” for venture capital investing, and thus Angel investing is still the San Francisco Bay Area, which includes San Francisco, San Jose, and Oakland, California. Other key geographies include:
- Boston, Mass.
- New York, NY
- Los Angeles-Long Beach, CA
- Seattle-Bellevue-Everett, WA
- Chicago, IL
- Washington, D.C.
- San Diego, CA
This does not mean that if you are not located in these geographies you won’t get funding. It just means you may have to travel a bit more to consummate a funding round.
If you’d like to get a complementary assessment of your business plan or investor presentation, or you’d like to register for one of our virtual coaching workshops, please contact us at , or to QuestFusion Virtual Coaching to learn more about virtual coaching and to register for a workshop. At QuestFusion, we love working with entrepreneurs, and we will work hard to help your company become the next great startup success story.
This is Patrick Henry, the CEO of QuestFusion, with The Real Deal…What Matters.