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January 12, 2009

So You’re Looking For Angel Money?

So You’re Looking For Angel Money?

Scott Shane

Small Business Trends

Summary

I n your efforts to raise money for your business, someone might have suggested that you tap angel investors – people who invest some of th

In your efforts to raise money for your business, someone might have suggested that you tap angel investors – people who invest some of their own money in private businesses run by others, who are neither their friends nor their family members – for the capital that you need. While that sounds promising, you don’t know if you have the kind of business that appeals to them. And you are smart enough to know that you don’t want to go after angel money if you don’t have the kind of business that will attract it. So what kind of businesses are angels looking for?

If you don’t have a highflying start-up that you plan to take public in the next few years, don’t worry. There are a lot of myths out there about what angels want, giving many people the inaccurate impression that they all have to have the next Google to get angel money. While few angels would turn down that opportunity, not all of them are looking just for those types of companies.

In fact, data on angel investing gathered by academic researchers suggests that most of the businesses that angels invest in aren’t the super highflyers that many newspaper and magazine articles focus on. Instead, they are much more mundane: 
  • The typical business that receives an angel investment is less than five years old, has sales of $200,000, and employment of seven.
  • About two-thirds of the companies are worth less than $1 million at the time of investment.
  • 25 percent of the businesses are found in the retail sector and 12.5 percent are found in personal services.
  • More of the businesses are cash flow positive than are seed stage businesses.
  • The typical business offers investors only a five times return on their capital over a ten year period.

In short, you just have to have a solid business opportunity to attract an angel investor, though it won’t hurt if your business will go public in two years at a very high valuation.

You can find out more about angels in Fool’s Gold: The Truth Behind Angel Investing in America.

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About the Author: Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of eight books, including Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By; Finding Fertile Ground: Identifying Extraordinary Opportunities for New Ventures; Technology Strategy for Managers and Entrepreneurs; and From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Company.

Scott is a member of the Small Business Trends Expert Network.