Angel investors are of two kinds: remote and local.
Remote angels typically are located within about a 100 mile radius of your home-base, are risk takers, and have made their money by selling out a business that they’ve either started or had taken over and revamped.
Typically, their business ventures are based on an innovative product or service, or an innovative method of marketing. I call them “remote” only because they are usually strangers, that is, not part of, or found through, our familiar networks.
Remote angels are intelligent gamblers. They embrace high risks in exchange for the uncertain prize of high returns. And they’re willing to risk their money because they believe that at least one of their ventures will some day pay off in extraordinary returns of 10 times, or perhaps even a hundred times, their original investment.
While waiting out the elusive pot of gold, the remote angel is hoping for a more attainable annual ROI (return on investment) of around 30 percent or more. Considering that about two out of three of his investments fail to pay back even his principal, this level of ROI is entirely reasonable.
The local angel, on the other hand, usually doesn’t think of himself as an angel or a high-risk venturer. He’s typically a successful businessperson or a professional with a good income.
Remote angels almost never invest in mere ideas, or even patented inventions that have no convincing evidence of their market potential. They’re interested in early sales that are growing rapidly, and the profits that such growth will yield.
That’s their basis for valuation of your enterprise; for determining how much they are willing to invest; and for judging what percentage of ownership they will demand for a given investment. Just as important, they are interested in your past accomplishments, your character, and your team. The nature of your product usually is less important then the reasons it is forecast to earn a high income.
Remote angels typically invest from $25,000 to around $100,000, although some will invest more.
A network of angels may invest much more if the venture’s needs are justified, and it promises extraordinary capital growth. The amount that the remote angel will invest will depend on specific needs of the venture, and will usually be doled out according to a schedule based on those needs.
Forget any dream of an open-ended checkbook. And the percentage of ownership demanded will depend on valuation from the angel’s perspective, as covered in last month’s issue. Typically, an angel will want to quadruple his investment in about five years, although such goals may change if the ongoing direction of the venture forecasts increasing opportunity or disappointment.
Local angels may invest a relatively small amount of seed money to cover prototyping and patenting expenses, typically $10,000 to $15,000. And they may be willing to share the royalties from a licensing deal, whereas remote angels are interested in capital gains from a venture sellout rather than ongoing income.
To convince a remote angel to invest, you’ll need a sell-sheet and an executive summary, and preparation for a face-to-face interview. Business plans of 30 plus pages, as taught in MBA programs, may be overkill, especially when your sales projections are based on little more than a wild-ass guess.
Your sell-sheet should convince the remote angel of the merits of your product. And your executive summary must stress sales growth, offering some kind of proof, such as the trend of early sales. If you haven’t yet produced and sold your product, you’re going to have to present a promise of sales that is very convincing. Surveys of future customers, opinions from distributors and retailers, inquiries from catalogers, and endorsements from well-known persons in your field will help.
Most important: you’ll need to convince the remote angel that you can manage marketing. If you’re a true inventor – dedicated and prolific – you’re probably not adept as a marketer. Get a partner who is marketing oriented, not another true inventor.
Local angels may be less demanding than remote angels, but any or all of the above support for pitching your case is bound to help. Remote angels will have definite ideas about the percentage of ownership they demand.
But local angels and most inventors will lack a firm grasp of an equitable percentage of ownership for each partner. If the inventor has contributed only the idea, and he’s asking his angel to pay for the patent search, the prototype, and the patent, in my opinion that the angel owns 67 percent of the venture. Ideas are abundant, and usually not worth much until patented – often not even then.
But if the inventor has done a responsible search for similar products, has received the results of a professional patent search, with a favorable patentability opinion, and has objectively surveyed public reaction to his potential new product, then a 50-50 split of ownership would seem appropriate.
Find remote angels and angel networks by doing a Google or Bing search for “angel investors.” Find local angels by asking CPAs, bankers, dentists, lawyers, Uncle Fred – anyone in your social and professional network who may be interested, or can refer you to someone who may be.
Angels want us as much as we want them. But you will probably have to kiss a lot of frogs before finding the prince.
Contact Jack Lander at [email protected]
Editor’s note: This article appears in the February 2010 print edition.