Angel Investors- Who Are They and Why Do They Invest?

Angel Investors are looking for the same thing all investors desire-a return on their investment.

What may set an Angel Investor apart from his peers is the amount of return that he is comfortable with, or without, as the case may be.

Angel Investors, or Angels, are individuals who invest in small businesses.

Often these Angels are family members, friends or mentors who see the potential in an idea and decide to fund it, assuming it will be a success and that they will be able to reclaim their investment.

There are said to be about 250,000 Angels active today, funding over 30,000 small companies.

Andy Sack, founder and CEO of Judy's Book, a website that allows people to write reviews of local businesses, has said "You'll only raise Angel money from people that are one or two degrees away from you. This is, Angels that know you or angels that know somebody that knows you."

This is a good thing to know upfront. Rather than taking your idea and pitching it to strangers who have had a thousand others ideas pitched at them, pitch your idea to someone who knows you and can envision your follow-through.

Talk with someone who already sees you as credible and you will have a much better chance of getting them to see the credibility of your business idea.

After all, while Angel Investors are somewhat different from, say, Venture Capitalists who want to see large returns very quickly, Angel Investors are still investors who want to make a profit.

They are not just doing you a favor, without opinion on your success or failure.

In fact, it is not uncommon for an Angel Investor to sue the owner of a small business-you!-if a reasonable return has not been made.

So, who should you approach?

A family member who is in the financial position to help you is a good place to start.

We all hate to ask family members this sort of thing. You may fear that you'll appear to be looking for a handout.

The first thing you must do is get that idea out of your mind. Determine the amount of faith you have in your business and then show that faith.

The Investor wants to know that there is a good chance that he will get his money back and then some. Convince him that it will happen.

Approach the family member from the standpoint of financial success. You are not looking for a handout. You are looking for an opportunity to make great money that will, in turn, become a great opportunity for the investor.

No rich family members? How about friends' family members? How about that nice couple at church who seems so fond of you? How about that customer who seems to show such interest in how your business is coming along?

It makes sense to an investor to be near his investment. It would be counter-productive to have to spend money traveling in order to physically keep an eye on the business.

Whomever you decide to approach, there are a few things you should have determined beforehand.

First, talk to a good business lawyer and protect yourself. Spell everything out down to the fine print.

Have a business plan and make sure it fits within the scope of the investor/lender you are soliciting.

If your business will not show the return this investor needs, you will not get past the stage of pitching your idea.

Show the investor how much or how little you are willing to have their input in your business. This is not a hand-out. Many investors will want a good bit of control. They may ask the business to agree to investor approval before taking certain actions.

The investor will want to know that you are going to make a return on their investment. They will want a timetable. You will need to show them, through your business plan, that in 3-7 years you will make significant revenue.

They may want to see an exit strategy. That is, they want to know that you are growing this business with the assumption that you will sell it and exit the company, making them the ultimate return in investment.

While they may not have as much money to put up as a Venture Capitalist, they want a high return on what they will put up.

They are investing because they believe in you as a business person as much as because they believe in your idea.

They are willing to take the risk of a start-up business so that they can invest less while gaining more.

It is your job to convince them that this is your goal as well. It is also your job to make that happen.

"Angels invested about 26 billion overall last year-an eleven percent jump from 2005", according to the Center for Venture Research at the University of New Hampshire. About 51,000 businesses were funded by angels.

Not all of this funding was done by solitary individuals.

There are Angel networks, or forums, where a number of wealthy individuals pool their money to make a more significant investment.

Typically, an Angel group, forum or network is interested in a start-up business but only after all individual backers have been exhausted (i.e. family and friends.)

Angel groups tend to invest in companies they understand. One of the benefits of having Angels as investors, is that most were entrepreneurs themselves and know a thing or two about business.

Keep your ego in check and you can learn a thing or two from these business elites.

Without losing total control of your business, you are wise to allow them some control and to listen when they give you business advice.

Remember, this is not a hand-out. This is not charity. This is not even a popularity contest.

This is a mutually beneficial business partnership.

With an Angel group, you have a pool of various business backgrounds from which you can mine gems of knowledge to help you grow your business and move on to the next.

They want to see you succeed because you are playing with their money! While they won't choose someone who exhibits the need for hand-holding, they will certainly offer sound advice when needed.

Remember when seeking an Angel investor, you are doing the interviewing.

By the time you are looking for this type of investor, you should have a very good handle on what your business is going to provide and just when it will be capable of providing it.

You should have confidence in what you are trying to start up.

You should be beyond selling it to yourself. You are now simply looking for someone with whom to share this great opportunity.

Make sure the investor is someone that you feel comfortable with. Don't choose someone who intimidates you or makes you feel that they have rescued you.

Choose an Angel investor or group of investors who wants to partner with you in a lucrative business proposition and then make it your job to show specifically how that is going to come about.

Have a flawless business plan that looks at the next five years.

Angels invest in people. They are often sold on the entrepreneur before they are sold on her product or idea. Show through attention to detail and methodical business practices, that you are an entrepreneur to watch.

Many Angel investors are looking for the "next big thing." They want in on something new and exciting.

XCOR, for instance, was founded in 1999. They are gearing up for their first flight-into space! They will offer three-minute rides of weightlessness with the price of admission being in the thousands of dollars per minute.

XCOR has funding from the Boston Harbor group, an Angel investor group which accepts investors by invitation only.

Boston Harbor group has a vision and XCOR meets that vision.

According to Alicia Chang, a writer for Linux News, "Boston Harbor said it was attracted to XCOR's management team and the fact that the rocket company has won government contracts, including from the Air Force, and intends to use its spaceship in other ways, such as for launching satellites and experimental payloads."

This company fit the criteria of its investors.

Find the investors who have the same sense of passion for the business you envision.

There is a perfect match out there.

Don't give up if the investor seems disinterested at first. Nurture the relationship. Openly share your enthusiasm for your business.

This investor may take a second look when she sees your passion and determination to get things off the ground.

Appeal to the Angel's desire to give back to the community while never neglecting his desire to make money. When an Angel finds both, a connection is made and a business launched.

Angel Investors invest in people.

As Andy Sack said to his friend Marcelo Calbucci, "A lot more deals are done in coffee shops than on Angel forums."

Indeed.

Do the work. Make the connections. Expect miracles.