An Entrepreneur's Guardian: Angel Investors

by Paul Kvinta

If friends and family typically invest in the entrepreneur, angels invest in the entrepreneur's idea.

Generally angels are individuals with money, time, and an attraction to risk, people willing to sink up to $1 million in a venture's infant stages. An angel might be a cashed-out, 35-year-old Internet millionaire who knows a great Web play when he sees one; or it could be, say, a retired, 65-year-old recording industry executive interested in pioneering pop music in cyberspace.

"They often already have a long relationship with the concept," says U.C. Berkeley's Dickinson. "They judge based on their gut. Investing in the early stages is like dope to them. It's exciting. They're addicted."

Angels are typically more inclined to provide early-round funding than venture capital firms. Often VCs manage funds so huge they logistically can't afford to scatter a bunch of $200,000 investments, which is why their commitments are fewer and larger. Angels also tend to be less aggressive than VCs, both in the equity stake they require and in managerial involvement. They often assume the role of friendly adviser, eager to share wisdom and—equally important—their Rolodex, an invaluable tool for recruiting management and assembling future funding.

When Atlanta entrepreneur John McCallum began to beat the bushes for angels last winter, he flushed out a half-dozen intrigued VC firms as well. In fact, interest was so great in his company, VetExchange, a Net-based service provider for veterinarians, that McCallum amended the amount he planned to raise from $1.5 million to $2.5 million. While two VC firms provided the bulk of that, McCallum still included angels in the round. "Our angels are networked across the country," he says. "They have relationships you can't imagine. They become cheerleaders for your team." One angel also recently played a critical role in advising McCallum on a strategic issue. "This guy's 50 years old, and he's dealt with the same issue five times before," he says. "You can't assign a value to that."

When searching for angels, leave no stones unturned. Check with friends, advisers, and so-called "venture catalysts" like Garage.com, which specialize in matching investors to startups. Attend networking events. Expect the unexpected. Once, Xuny's Lynn McPhee and her partners arranged to meet with a potential investor at a Los Angeles hotel where an online entertainment conference was taking place. The strapped entrepreneurs couldn't afford to attend the conference, but after meeting with the investor they stumbled across a conference binder someone had left in the lobby bathroom. "We ended up getting two angel investors from the contact list in the back of the binder," she says.

Most angels frown on cold calls, so find a third-party introduction. When you do meet, you'll typically have 45 minutes to provide a company overview, field questions, and probe the investors' interests. Angels look for solid management with good credentials, but they're even more interested in your market research, your potential customer base, and your competition. "We want pain killers, not vitamins," says John Morris, the head of Tech Coast Angels in Los Angeles, a group of 140 angels who review 30 to 50 business proposals a month and fund one or two. "We want the unfilled need in the market really being felt, causing pain."

It helps to love your idea, because you'll pitch it dozens of times before anyone signs on. Not that there's anything wrong with that. In fact, telling your story over and over in an angel community can create a certain buzz that ultimately becomes irresistible. "You're chumming the water, essentially," says Mike Becker, cofounder of PlanetJam Media Group. "Waiting for a big fish to bite." One finally did for Becker. After he and his partners spoke to some 30 angels in Atlanta last winter, a "prominent Southeastern angel" took notice of their company, which places and manages music content on the Internet for artists and record labels. That angel not only attracted half a dozen other angels to the round, he introduced Becker's team to a VC firm, PtekVentures, and the combination angel–VC round raised $2 million.

Pros– It could be your first significant chunk of change, and angels give advice without making demands.

Cons– Don't expect millions.

Verdict– Great for early-round funding as you develop traction in the market. As U.C. Berkeley's Dickinson says, "You'll get more good advice per buck from an angel than from a VC."