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Calling On Angels - Part 3

How Much Do They Invest and What Kind of Equity Stake Do They Expect? The Kauffman Foundation studies indicate that from individual angels you can anticipate as little as $20,000 and an average...

Written By: Grow Utah Ventures
How Much Do They Invest and What Kind of Equity Stake Do They Expect?

The Kauffman Foundation studies indicate that from individual angels you can anticipate as little as $20,000 and an average of about $100,000 to $500,000. Its research has also found that in 2005, the average round of investment from angel groups was $266,000 with the range tending between $100,000 and $1 million. But Hudson also points to several examples of angel groups co-investing up to $2 million or more.

Some angels do provide loans, but for the most part, angel investors expect equity. That's what they trade you for — a chunk of your company for a chunk of their money. The typical stake can range from 5 to 40 percent, according to Kauffman numbers, but the average range is 15 to 30 percent. That may seem like a lot to an entrepreneur who hasn't done this before, but to the angel investor, it's a way to secure a reasonable return on his or her investment, and perhaps more important, a way to secure involvement in the company.

"If they are not going to own 15, 20, 25 percent of a company, at some point they feel like, ‘I'm not really a partner in this business,'" Warnock points out. And since angel investors are often motivated by more than just financial return, a small equity stake that means small participation isn't as attractive.

Giving up ownership may also be the best way to take your own remaining equity stake to a much higher level, says Frey. "When there is a real opportunity in the market that additional capital would allow you to capture and would increase the overall value of your venture by more than the equity you would have to give up, it's advantageous for you to raise capital," he says.

What Do They Look for In a Potential Deal?

"The bedrock considerations are favorable valuation and deal terms, a scalable business with high margins and accessible market, a defensible position with respect to intellectual property and competition, a well-balanced management team with a track record in the designated space, a clear exit path, and of course projected return on investment," Howells says.

But he adds that angels look for intangibles too, like philosophy, chemistry and intuition. "Too often during the pitching process entrepreneurs are focused on a product or concept demonstration and overlook the fact that they are selling an investment with many elements that extend beyond the scope of the business activity," says Howells.

A big one is the management team. For White, "The key is the management team. Everything else is secondary."

Investors are keenly interested in the management team for one reason: risk. "When you put together a business plan and a forecast for your project, the only thing you know for sure is what's on the business plan and forecast, will not happen," Warnock says. "You don't know if it will under-perform or over-perform, or in what ways it will change. But the business world is so dynamic that there's just no chance you'll execute exactly to strategy. Knowing that, we're looking for a team that can be adaptive and reactive and make good decisions in responding to changing circumstances."

Other factors that attract an angel to a deal include return on investment, involvement, legacy and community building, and mentorship, Howells adds.

How Do You Keep Your Foot Out of Your Mouth?

Knowing what angel investors look for in a potential deal will help you target specific angels who are compatible with what you have to offer and then help you prepare for the meeting.

"The entrepreneur will only get one chance to make a first impression," White notes, "so he or she should learn everything possible about the prospective target before contact is made. Most entrepreneurs are surprised at how much can be learned, first from public information such as the Web and printed sources, and then from person contacts."

When given the chance to pitch to angels, send no more than two people to the presentation and deliver a well-rounded overview in 15 minutes or less, says Howells. "The objective is to create interest and generate further discussions," he says. "By definition, angel investors do not expect a fully actualized and executed business plan."

But they do expect candor and an accurate analysis. "Shortcomings, inaccuracies and exaggerations are usually exposed during due diligence anyway, so why risk your credibility?" Howells points out.

"Entrepreneurs need to be forthright," Hall adds. "People want to hear the good and the bad."

Something else to consider as you approach angels: be realistic. Blake points out that statistics show a mere 1 to 2 percent of everyone who is looking for equity money actually gets it. "You have to be a very, very, very good deal to raise money," he says.

But you'll help your chances if you are prepared — something angel investors see entrepreneurs consistently fail to do. From practicing your presentation before you get in front of investors to having your company correctly positioned for investment, entrepreneurs need to have their ducks in a row.

"They haven't created a good legal team or engaged a good tax player. They have a good product but don't understand yet who their real client is. They probably have underestimated their time to market," says Henderson as he lists common mistakes he sees.

Finally, have a long-range plan for your company. Angels get the return on their investment at the end of the life cycle, so you have to be prepared to explain what the exit strategy is. And be realistic about that too, says Hudson. "Angels who are sophisticated very rarely expect you to say IPO as your exit option. Mergers and acquisitions are really the exit option they are anticipating," she says.

So know how you are going to grow to the point of merging or being acquired. "Entrepreneurs have to be able to describe how they would end up selling their business," says Hall.

A Few Reasons To Consider Calling On Angels

Finally, it's important to realize that angels bring more to the table than just cash. They bring experience, objectivity and a network. And those intangibles may be worth more than their money.

"The right angels, the sophisticated ones, really help an entrepreneur build their company," Hudson points out. "I've seen amazing stories about how their background and credibility have ultimately been more important than their money."

Because angel investors are often motivated by more than a return on investment, they usually want to engage in the growth of the business, mentor the entrepreneur and utilize their networks. "A lot of them are former entrepreneurs themselves and just love to stay involved and use their skills and experiences," Hudson says. "And many of them are all about helping to build great companies in their communities as a way of economic development and a way of giving back."

So if you are at the right stage, in the right location, and willing to trade ownership for funding, then angel investment may be the perfect way to grow your company and tap into Utah's brightest minds and deepest experience.

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