Angel Investors

This primer on angel investors was written as a chapter in the book called Where's the Money. I wrote the book under agreement with its' authors Dwayne Moyers and Art Beroff and with Entrepreneur Media, Inc.

David R. Evanson

Where’s the Money?, Fall, 1999

Definition or Explanation: Venture capital from individual investors. These investors look for companies which exhibit high growth prospects or have a synergy with their own business or compete in an industry in which they succeeded.

Appropriate For: Early stage companies with no revenues to established companies with sales and earnings. Companies seeking equity capital from angel investors must welcome the outside ownership, and perhaps the surrender of some control. In addition, to successfully accommodate angel investors, a company must be able to provide an “exit” to these investors in the form of an eventual public offering or buyout from a larger firm.

Supply: The supply of angel investors is large within 150 mile radius of metropolitan areas. The more technology driven an areazzs economy is, the more abundant these investors are. According to Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire, Americazzs 250,000 angel investors pump some $25 billion to $30 billion into growing businesses, each year [italicize each year]

Best Use: Runs the gamut from companies developing a product to those with an established product or service, that need additional funding to execute some marketing program. Also, for companies that have increasing product or service sales and need additional capital to bridge the gap between the sale and the receipt of funds from the customer.

Cost: Expensive. Capital from angel investors will likely cost no less than 10% of a companyzzs equity, and for very early stage companies perhaps more than 50%. In addition, many angel investors will charge some sort of management fee, in the form of a monthly retainer.

Ease of Acquisition: Angels are easy to find but sometimes difficult to negotiate with, because they usually do not invest in concert, and may demand different terms.

Range of Funds Typically Available: $300,000 to $5 million.

For most small or new businesses, so-called angel investors are the most appropriate source of financing. There are many reasons for this. Some of the more fundamental and important:

• Angel investors are one of the most abundant sources of capital in the U.S. Americazzs 250,000 angels invest $25 to $30 billion each year in growing businesses.
• Angel investors typically provide equity [italicize equity] capital. For most emerging businesses, equity capital is appropriate, because it is permanent, and does not require monthly or quarterly interest payments.
• Angel investors will typically invest in business for reasons other than economic. A desire to help young entrepreneurs, and fill the role of the mentor they never had, is a reason frequently cited by angels about why they invest.
• The amount of capital which emerging business need, generally from $250,000 to $5 million matches the commitments which angels typically make.


Shop Talk: The term angel investor derives its origin from Broadway. The wealthy individuals who typically financed lavish productions were dubbed angels, because of the small likelihood of ever realizing a return.


Angel investors are at once difficult and easy to find. The situation is analogous to searching for gold. Generally, itzzs difficult to find, but once you hit a vein . . . all of your hard works pays off in a big way. Here are he places to look to find angels.

– Universities. According to Bob Tosterud, executive director of the Council of Entrepreneurship Chairs, a council consisting of business schools with endowed entrepreneurship chairs, even schools with fledgling entrepreneurship programs generally have top rated professors with ties in business and academia. Angel investors, says Tosterud, tend to hover near these programs because of the high level of new business activity they generate. Tosterud counsels that if you are looking for money, call the nearest university with an entrepreneurship program, and make an appointment to speak with the person running the program. Generally, he says they can point you in the direction of angels.


A Good Deal: Angel investors often add value in areas where new or emerging businesses need help such as sales, marketing, strategic planning and finance. In addition, angel investors often prove to be an invaluable reservoir of contacts.


– Business Incubators. According to the National Business Incubation Association, (NBIA) there are more than 550 business incubators in North America. At first blush, incubators appear to be mere bricks and mortar that offer entrepreneurs reasonable rents, access to shared services, exposure to professional assistance, and an atmosphere of entrepreneurial energy. But, according to NBIA executive director Dinah Adkins, many business incubators offer formal or informal access to angel investors. While many of these relationships exist for the benefit of businesses actually in the incubator, not all do, and an incubatorzzs director may offer to make some introductions for you. On the other hand, maybe putting your business in a business incubator is not such a bad idea . . . .

To find a business incubator near you see the chapter in theis book titled Business Incubators.

– Venture Capital Clubs. The tremendous wealth created through the commercialization of technology, and a robust stock market for the past 15 years has resulted in a large number of angel investors who have begun to formalize their activities into groups or clubs. The clubs actively look for deals to invest in, and want to hear from entrepreneurs looking for capital.

– Angel Confederacies. Many angels band together in informal groups that share information and deals. Many times members of the group will invest independently, or join together to fund a company. So-called confederacies are not easy to find, but once you find one member, you can gain access to them all, a figure that might top 50 investors.


Taking Action: Find at least one angel-oriented networking event in your area and attend. Try to collect at least 10 business cards. And try to give out at least 10 as well.


Here are 10 actions steps you can take to find angel investors in your area.

1. Call your Chamber of Commerce and ask if its hosts a venture capital group. Many such groups have a chamber affiliation.
2. Call a Small Business Development Center (SBDC) near you and aks the executive director if he or she knows of any angel investor groups. . Ask the SBA if you donzzt know where an SBDC is.
3. Ask your accountant. If your accountant doesnzzt know, call a “Big Six” accounting firm and ask for the partner handling entrepreneurial services. Ask him or her to point you in the right direction.
4. Ask your attorney. They always know who has money.
5. Call a professional venture capitalist and ask him or her if they are aware of an angels investor group.
6. Contact a regional or state economic development agency and ask if they are aware of an angel investor group.
7. Call the editor of a local business publication and ask if they know of any groups. They often write about such activity.
8. Look at the zzPrincipal Shareholderzzszz section of initial public offering (IPO) prospectuses for companies in your area. This will tell you who has cashed out big.
9. Call the executive director of a trade association which you belong to. Ask if there are any investors which specialize in your industry.
10. Ask your banker. If you bank at a small bank, ask the president of the institution. If yourszz is a larger commercial bank, ask your lender. If you do not have a lender, ask for a lender who works with loans of $1 million or less. A good small business banker will know of such a group because companies which have received an equity investment are good candidates for a loan.



A Good Deal: Angel investors can often fill the role of de facto financial advisor, and in this role, can lead you to other sources of financings. Once theyzzre in your court, all you have to do is ask.


One word of caution is in order. Formal venture capital groups come in two stripes: those which cater to individual investors or angels, and those which cater to professional, institutional venture capital funds. If you are pursuing angel investors itzzs important to pursue the kinds of clubs that will cater to your needs. For instance the New York Venture Capital Group, in Manhattan, is a vibrant organization. But it caters mostly to professional venture capitalists. By contrast the Western New York Venture Association in Amherst, encourages memberships for individual investors.


In 1982, Congress quite accurately recognized that many of the federal secuities laws on the books represented an impediment to capital formation for smaller businesses. The result was the creation of Regulation D, which among other things, offered small companies exemptions from federal securities laws for certain kinds of transactions. There are several wrinkles to zzReg Dzz as it is known, but three important rules which could influence any kind of deal you strike with an angle investor are as follows.

– Rule 504. This rule is the least restrictive of all the federal securities laws exemptions, and allows issuers, i.e. companies to sell up to $1 million of securities during a 12 month period, with no restrictions on the number or qualification of investors. In addition, there are no information requirements and general solicitation and advertising of the offering are permitted. In short, using Rule 504, a company can sell securities to anyone, without providing any information, and still not provoke federal secuirities laws.

– Rule 505. This rule allows companies to raise up to $5 million, from 35 “nonaccredited” investors and an unlimted number of accredited investors. Accredited investors are also defined by Reg D. There are 16 separate definitions, which range from banks, to employee benefit plans, to wealthy individuals. In the context of this discussion, accredited investors refer to individuals or angels. Individuals are considered accredited if they have joint or net worth in excess of $1 million, or joint income in excess of $300,000.

Rule 505 imposes some information disclosure requirements on the issuer, unless the securities are sold exclusively to accredited investors.

– Rule 506. Deals structured under Rule 506 are sometimes called unlimited private placements, because Rule 506 can be used to raise any amount of capital. An unlimited private placement can be sold to as many as 35 nonaccredited investors and an unlimited number of accredited investors. Rule 506 does impose some so-called sophistication requirements on the nonaccredited investors. Specifically, the company must beleive that the nonaccredited investors have the expereice or counsel to evaluate the merits and risk of the offering.

Using rules 504, 505 and 506, companies can escape the burden of federal securities laws. However all states have securities laws as well. What is exempt at the federal level may not be exampt at the state level. If your offering is not exempt at the state level, you may find you have to file the kind of registration statement with state securities authorities which you were trying to avoid at the federal level.


Donzzt Forget: Every state has securities laws too. Selling securities to investors in your state or in another state may provoke two sets of securities laws. Find out if you invoked any state securities laws before [italicize before] you take an investorzzs check.


As with all securities matters, itzzs always best to check with a securities attorney before soliciting an offering or accepting money from investors.


The importance of the chemistry between entrepreneur and investor cannot be underestimated. “Ultimately,” says angel investor Rich Bendis, who is also president of the Kansas Technology Enterprise Corporation, “while economics play a big role in a deal, so too does personal chemistry.” In fact, consider that while a banker may completely trust and like an entrepreneur, he or she will not change their lending criteria a single iota because of these feelings. But with angel investors, the situation is completely opposite: if they develop a bond with an entrepreneur, angels can be convinced to do almost any deal.

Because of this phenomena Bendis says that entrepreneurs must understand the basic investor personality types because it will help them forge the bond which is so vital to closing the deal. While private investors come in many different shades, they can be broken down into five basic types. These are 1) Corporate angels; 2) Entrepreneurial angels; 3) Enthusiast angels; 4) Micro-management angels; 4) Professional angels.

– Corporate Types. Corporate angels are senior managers at Fortune 1000 corporations who have been outplaced or taken early retirement. Stock options, and a robust stock market have created an entire new generation of wealthy, or at least wealthier, corporate executives. Corporate angels act like they are looking may say they are looking for investment opportunities, but in reality, they are looking for another job. This doesnzzt mean they wonzzt invest. Bendis says these investors typically have about $1 million in cash and may invest as much as $200,000 into a deal, but some kind of position, usually unpaid at first, comes with the bargain.

Bendis says corporate angels typically make just one investment, unless their last one didnzzt work out. And with respect to the one investment they make, corporate angels tend to invest everything at once and tend get nervous when the hat gets passed their way again.


Donzzt Forget: Angels invest in companies for reasons that often go beyond just dollars and sense. As a result, your appeal must be financial, but also emotional. zzWe need more than just dollars, sir. We need you to bring your incredible wealth of expereince to the table as well. In the long run, it may be even more important than capital.zz


– Entrepreneurial Angels. These are the most prevalent investors, according to Bendis. Most of them own and operate highly successful businesses. Because these investors have another source of income, and perhaps significant wealth from an IPO or partial buyout, they will take bigger risks and invest more capital. Whereas the corporate angel is looking for a job, the entrepreneurial angel is looking for 1) synergy with their current business, 2) a way to diversify their portfolio or in rarer instances, 3) a way to prepare for life after their current business no longer requires their attention. As a result of this orientation, these investors seldom look at businesses outside of their area of expertise, and will participate in no more than a handful of investments at any one time.

According to Bendis, entrepreneurial angels almost always take a seat on the board of directors but hardly ever take on any kind of management duties. They will make fair-sized investments, $200,000 to $500,000 and invest more as the company progresses. However, because of their agenda, when the synergy or the potential they initially perceived disappears, oftentimes so do they.

– Enthusiasts. While entrepreneurial angels tend to be somewhat calculating, enthusiast angels as they are termed, simply like to be involved in deals. Bendis says that most enthusiast angles are 65 or older, independently wealthy from success in a business they started, and have abbreviated work schedules. For them, investing is a hobby, and as a result, they typically play no role in management and rarely ever seek board representation. But because they spread themselves across so many companies the size of their investments tends to be small — from as little as $10,000 to perhaps a couple of hundred thousand dollars. “On the plus side however,” notes Bendis “enthusiasts tend to have a difficult time saying no, and often will bring their friends into a deal.”

– Micro-management Angels. “Micro-managers are very serious investors,” according to Bendis. “Some of them are born wealthy, but by far the vast majority attained wealth through their own efforts.” Unfortunately, this heritage makes them dangerous. Since they have successfully built a company, micro-managers attempt to impose the same tactics they used with their own companies. Though they do not seek an active management role, micro-managers usually demand a board seat. If the business is not going well, they will try to bring in new managers.

Bendis says itzzs possible to exploit the behavior patterns of micro-managers, but at a cost. “Specifically, they enjoy having as much control as possible,” he says. “Many will gladly pay for it by putting more capital in the business.”

– Professionals. The term professional in this context refers to the investorzzs occupation such as doctor, lawyer, and in some very rare instances, accountant. Bendis says that professional angels like to invest in companies which offer a product or service with which they have some experience: a doctor will look at medical instrumentation companies, a franchise attorney will look at franchise deals, and so on.

These investors tend not to have the need to know whatzzs going on in the business day to day and they do not micro manage their portfolio companies. In fact professionals rarely ever seek board representation. However, Bendis says, they can be unpleasant to deal with when the going gets rough, and may believe that a company is in trouble before it actually is.

Bendis says professional angels will invest in several companies at one time, and their capital contributions range from $25,000 to $200,000. He adds “They are good for initial investments, but are less likely to make follow-on investments.” Perhaps more than any other category of investor, professionals operate within loosely defined, but clear networks, and they tend to have more comfort investing alongside their peers. Thus, the first professional investor which you find will likely offer a pathway to others. Finally, professionals can also offer additional value when they bring to bear legal, accounting or financial expertise for which the company would otherwise have to pay hefty fees. Be forewarned however, because some professionals want to get hired after they invest.

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