When startup companies pursue capital to obtain resources to take their business to the next level, or to get it off the ground, the most commonly thought of money is venture capital. Another option is “angel financing” on the part of individual investors. John May, managing partner of Vienna, Virginia.-based New Vantage Group and vice chair of the Angel Capital Association sat down with Gerald L. Gordon, Ph.D., president and CEO of the Fairfax County (Virginia USA) Economic Development Authority, to answer 10 questions about angel financing.
Who exactly are angel investors?
Generally, they are accredited investors (million of dollars of an individuals’ net worth) who take a small portion of their wealth and invest it in minority positions in risky private start ups in order to get into high growth opportunities early. They are generally cashed out entrepreneurs, highly paid professionals or executives giving back to their industry.
Where do angel investors fit in the spectrum of the investor community?
Angels, generally, but not necessarily, are active after "friends, family, and fools" and before institutional venture capital or banks as companies seek growth capital. They are usually the first outside capital and often times provide advisory support too.
How are angel investors different from venture capitalists?
Venture capitalists are institutional investors, managing other people's money, making investments into early stage private companies seeking superior rates of return to offset the high risks of venture investing. There are about 1,000 venture firms in the U.S., highly concentrated on the two coasts. Angels are by definition individuals investing on their own account, often times seeking other rewards beyond financial return, what we call mentor capital. We estimate that there are more than 250,000 angels and they are located in every community of the country.
Are there any requirements that are different for companies seeking angel money as opposed to venture capital money?
Generally, you don't have to be so far along to attract the attention of angels - they are filling the gap left by venture capitalists becoming founders of later and larger opportunities. If you run out of personal money and do not need millions yet, angels are great in the $250,000 - $1,000,000 range.
What are the benefits and risks of obtaining angel financing?
The prime benefit is the mentoring and personal advice and support - this comes with what I call "warm money" and the main drawback is the depth of pockets and depth of support that individuals (or even groups of angels) can bring as opposed to deep pocketed institutional or corporate sources. At the early stage of growth, angels are best because they are trying to catch the opportunity early and want to provide value add services - just be sure to do homework on the individual angel just as you would when hiring a key staffer or interviewing venture capitalists.
What steps can/should a business take to obtain angel financing?
First, be patient. Then develop a good, compelling plan about the product or service they have deployed (hopefully with a large potential market) and network, network, network.
How does one get plugged into the angel network?
Cold calls are very ineffective so connecting through industry contacts, corporate lawyers, governmental incubators or technology councils, or successful entrepreneurs to be introduced to resources they know is best. Less than one percent of "over the transom" deals ever get funded by serious money - you need a warm referral to get an audience with angels or the emerging angel groups like Active Angel Investors.
What is Active Angel Investors?
Active Angel Investors is a group of private investors that was formed in early 2003 in order to make early stage investments into regional entrepreneurial companies. It is a pledge fund of 45-50 men and women investors, where they opt in to invest in companies that present at monthly meetings on a deal by deal basis. The group has made seven investments as of summer 2005.
Is the Washington, D.C. area, particularly Fairfax County, a good source for angel investing?
We have a deep reservoir of active angles, both because this is a very wealthy region but also because we have become a very entrepreneurial one. Many start ups begin here and many cashed out entrepreneurs are staying around town and helping new players starting new concepts and companies in this fertile business climate.
Is it best to pursue angel investors by industry or location, and why?
Most angels invest within one hour drive time from their home (their base region) and often times primarily into markets and products they understand - or have worked in previously. The Washington, D.C. region in particular is ripe for Internet, telecommunications, security and life science opportunities.
Thousands of companies have chosen Fairfax County, Virginia, located just west of Washington, D.C., as the best place to expand or relocate. Fairfax County is home to six Fortune 500 companies, 4,700 IT companies and more than 330 foreign-owned firms. Fairfax County features a quality of life that's hard to beat. It has one of the highest percentages of residents with bachelor’s degrees or higher in the nation. Money magazine in 2005 named the Fairfax County community of Vienna one of the best places to live in the U.S. And being close to the federal government provides access to billions of dollars in federal contracts. If you are thinking about expanding or relocating your company, give Fairfax County a look. The award-winning Fairfax County Economic Development Authority has experts who can help – at no charge. Call 703-790-0600 or check out www.FairfaxCountyEDA.org.