December 17, 2018

How to Find Angel Investors

Rick Norland

Rick Norland
Owner/Thorington Corporation

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The Challenge

 

Intuitively, there is a certain “elasticity” to the number of Angels one must approach to close a deal.  With the average Angel investing, say, $50,000 per deal, a good quality company likely has to approach ten Angels for each one that says “yes”.  Alternatively, about twenty Angels must be approached to find one who is interested to invest $150,000 or more in a given investment opportunity.  Using these “funnel” numbers, a company raising $500,000 must approach 70 to 90 Angels to attract the necessary commitments.

As a function of these “funnel” realities, Angels can usually be counted on for issue sizes of up to only $500,000, with declining probabilities beyond that.  For issue sizes over $750,000, it gets to be very difficult to find the interested Angels to meet the issue size – market efficiency begins to wane rapidly.  Over $1 million in issue size, it’s almost impossible to get a deal done with Angels alone and syndicates usually require other investor types in the group. 

Interestingly, there are more than enough Angels to do these smaller deals. The difficulties come in trying to find them.  This poor “market efficiency” is a reflection of the anonymity to the “outside world” that most Angels prefer.  By contrast, personal research indicates that Angels desire more exposure within the Angel community itself (and only there).  Essentially, many Angels complain of having “lost” deals because they could not interest enough “friend” Angels to complete a syndicate (they don’t normally invest alone).  Equally, they welcome the opportunity to share experiences and views with other Angels.  

While it may seem intuitively simple to build an Angel network to foster inter-community ties, most Angels would shun any outsider (i.e. non-Angel) involvement.  Network building can only be done by “one of their own”.

 

Profile of an Angel Investor

 

Assuming an interest in VC Path opportunities (see below), Angels expect between a 40% and 60% annual return on their investment and are often willing to actively help the entrepreneur build his business.

The commonly regarded profile of an Angel is:

  • 50-year-old male;
  • Well-educated, professional;
  • Self-made success;
  • High-risk taker;
  • Net worth over $1 million; and,
  • Annual income over $100,000
  •  

Angels and Their Portfolio Management Strategy

As a rule, Angels are sophisticated investors that invest in a number of alternative investment vehicles.  Private company investments typically represent 10% to 20% of their overall investment portfolio.  Typically, Angel investors also have holdings in the public stock market, fixed income investments (e.g. GICs), real estate, and collectibles.  Having this mix of investment interests can make Angels different from other private company investors.  Most venture capital investors are uniquely interested in a company’s equity return prospects only.  Expanding, most VCs are not interested in fixed income investment opportunities (except as a means to otherwise mitigate equity risk – still their primary interest).

Understanding that Angels consider a portfolio approach to their investment process can be important.  For example, the sudden decline in public stock prices in 2001 had a negative impact on the net worth of many Angels.  If they are comfortable with private company investments constituting a small portion of their overall portfolio, the rapid public market declines may effectively remove these Angels from the investment activity until stock market prices improve and “right” their portfolio asset allocation mix.

A second important portfolio management element to appreciate is to understand that Angels may be open to non-equity investments.  For example, Angel monies that are allocated to second mortgages (garnering an interest rate of, say, 14%) may be allocable toward a private company’s subordinated debentures.  The realization that Angels have a broader interest than simply equity makes them a different type of investor than a venture capitalist. 

Comments? You can contact me directly via my ExecRanks profile.

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