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The Right Way to Raise Money From Angels
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After you’ve maxed out your credit cards and tapped your family and friends, the next step for an entrepreneur is to look for so-called ‘angel’ investors. These usually are wealthy people who will invest anywhere from $25,000 to $100,000 in early-stage ventures (and typically will receive stock in the company). Some of the world’s top companies — including Apple (NASDAQ:AAPL), Zynga (NASDAQ:ZNGA), Groupon (NASDAQ:GRPN), Google (NASDAQ:GOOG), Amazon.com (NASDAQ:AMZN) and Facebook — got funding this way.
But for entrepreneurs, dealing with angels can be prickly. Here’s some advice to guide you along the process:
Location, Location, Location
I often hear entrepreneurs say that they can’t find angel investors. Then they tell me their company’s location, and it sometimes is somewhere lacking in angels. To boost your odds, go where the action is — Silicon Valley, New York and even Los Angeles. These areas have strong entrepreneurial ecosystems.
Advisors
Make sure you have a good attorney that specializes in start-up financing. He or she will help craft documents that will give you the control to develop your products so you can eventually get your Series A round. It’s also good to have an experienced board member who not only knows the financing process, but also how to focus the right milestones to get the interest of venture capitalists.
Get a Top Angel
When starting a business, you need to find ways to get credibility. One way is to bring on a well-known angel. For instance, if you’re a gaming company, wouldn’t it make a big difference if you got an early designer from Zynga?
Getting a top angel will make it easier to find other angels to form a syndicate. This means your angel round can get to a level of $200,000 or more. But try to avoid having too many angels. Having more than five or six can make managing your deal a time-suck.
Angel Groups
Angel groups are organizations that focus on angel-stage investments. In some cases, they might have more than 100 members. An angel group can be a good source of capital, with possible funding of more than $1 million. But the process can easily take several months, with multiple meetings and extensive due diligence.
Another option is to consider an accelerator, like Y Combinator or TechStars. These involve not only investors, but also mentors that help evolve the business model. However, the likely funding amounts are generally much less — like less than $100,000.
Background Checks
It’s hard to say “no” to an investor who’s willing to write a check for your venture, but sometimes it’s the right decision. The fact is some angels can be, well, demons. They might have little experience in the entrepreneurial process and, as a result, have unrealistic expectations. And do you really want an investor to call you every day about the status of the company?
So before taking on an angel, get references and conduct several meetings to see if the fit is right.
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