Angel investors are getting tougher. To land seed money,
you should, too.
You've probably heard the rumors: Angel investors aren't as angelic as
they used to be. Such investors, generally wealthy individuals, have been
essential to American entrepreneurs, betting on early-stage ventures that
frighten most other investors. But angels are getting a lot harder to
please. And that has implications for any entrepreneur seeking seed
funding.
The good news is that angels are picking up much of the slack from
venture capital funds, which are increasingly focusing on later-stage
outfits. Last year alone, 42,000 angels plowed $18.1 billion into
early-stage companies, compared with a mere $304 million plunked down by
VCs, according to a recent study by the University of New Hampshire's
Center for Venture Research. But while angels have always had high hopes
for the companies they invest in, these days they rely a lot less on their
guts than they do on the facts, says David Rose, chairman of the New York
Angels, a 50-member group in Manhattan.
Not surprisingly, the shift dates back to the dot-com crash -- which
made all investors more risk-averse. As a result, most angels are
interested only in companies that are likely to post positive cash flow
within 12 to 18 months. "I want to know if I can double, quadruple, or
increase my investment tenfold in five years," Rose says. Unless you
already have a service or product, a few customers, and an exit plan,
that's not likely to happen.
Rudy Prince learned that lesson last year when he began drumming up
financing for Always On Wireless, the telecom start-up he founded in
Houston in 2003. Back in 1988, Prince had landed $500,000 from angels for
his first company, JetFax, so he thought he knew what to expect. JetFax's
product -- software that lets users send faxes over the Web -- was little
more than an idea on paper. But the angels had no problem signing on. This
time around, Prince had a fully developed product -- the WiFlyer, a gadget
that lets dial-up users connect to the Internet without wires. What's
more, Prince and his partners had already ponied up about $200,000 in seed
money, so they were asking angels to participate in a first round of
investing, which is considered less risky than standard angel deals.
Nonetheless, he says, the angels he talked to were extremely skeptical.
"They're no longer relying as much on leaps of faith when it comes to
investing," he says.
Still, by waiting until his start-up was perfectly positioned, Prince
increased his chances of landing an angel deal. After Prince tapped his
network of friends and business associates, a friend introduced him to a
group of former telecom entrepreneurs, who plowed $1 million into Always
On last July. The financial terms weren't much different than they had
been in '88. Both groups of angels, for instance, expected returns equal
to between five and 10 times their initial investments. But today's angels
weren't willing to wait. JetFax's angel investors didn't receive a return
for nine years, when the company went public in 1997. This time around,
the pressure is on for Prince to make an exit within five years. With IPOs
harder to pull off than in the late 1990s, Prince plans to focus on
finding a buyer. He would not disclose the equity stake his angels
received in the JetFax and Always On deals. But, in general, angels have
always expected to get 25% to 35% of the company stock. Of course, the
value of the stock varies depending on the market value of the company's
assets, and, since Prince's first business was less mature, it garnered a
much lower valuation than Always On.
Still, in one way at least, landing angel financing has gotten easier.
Until recently, there was no clearinghouse for angels, making them
difficult to find. Last year, however, the Ewing Marion Kauffman
Foundation launched the first angel investor network -- the Angel Capital
Association -- which has 60 members so far. Its website (www.angelcapitalassociation.org)
features a directory of dozens of angel groups, sorted by state and
region.
Even though angels are getting tougher, they've remained true to their
name when it comes to offering advice and support to entrepreneurs. "They
bring a lot of experience and know-how to the table," says Prince. "They
have a real interest in seeing you do well." Prince's angels, for their
part, used their industry connections and expertise to help him bring the
WiFlyer to market in time for the 2004 holiday season. This year alone, he
expects his fledgling company to generate an impressive $10 million in
sales. As far as Prince is concerned, he's found the perfect match. "If
you can get good angels that offer more than a check, then you have found
a great fit," he says.
