The Art of Raising Angel Capital

Make no mistake about it: There is an art to raising angel capital. Raising angel capital is not harder or easier than raising institutional venture capital—it’s simply different. Here’s how to do it.

1. Make sure they are “accredited” investors. “Accredited” is legalese for “rich enough to never get back a penny.” Just read what the SEC says. You can get into a boat load of trouble for selling stock to the proverbial “little old lady in Florida,” so don’t do it. And get a good corporate finance attorney (as opposed to your aunt the divorce lawyer) to advise you about the process of seeking investments.
2. Make sure they’re sophisticated investors. I’m a masochist for hate email, but I’ll tell you anyway: the least desirable angel investor is a rich doctor or dentist—unless you’re a life sciences entrepreneur. They will drive you crazy because they read how Ram Shriram made gazillions of dollars as an early investor in Google, and now, six months later, they want to know when you’re going public too. Sophisticated angel investors have knowledge and expertise in your industry—they will have “been there and done that.” Sure, you want their money, but you also want their expertise. Be warned: if you want to raise venture capital in later rounds, it’s going to be much harder if you show up with a long list of unsophisticated investors.
3. Don’t underestimate them. If I had a nickel for every time an entrepreneur told me that she was going to raise angel capital because it was easier than raising venture capital, I wouldn’t have to run ads in this blog. Do everything on the venture capitalist wishlist because the days of angel investors as “easy marks” are gone forever—if this was ever true. You can have an “early stage” company but not a “dumb ass” company, and angels care as much about liquidity as venture capitalists—maybe even more since they’re investing their personal, after-tax money. Angels do not consider investments to be “charitable contributions”—well, no angel whose money you’d want, anyway.
4. Understand their motivation. Here’s how angel investors differ from venture capitalists. Typically, angel investors have a triple bottom line. First, they’ve “made it,” so now they want to “pay back” society by helping the next generation of entrepreneurs. Second, they’d like to stay current with technology and tinker with interesting products and technologies. Finally, they want to make money. Thus, they are often willing to invest in less proven, more risky deals to provide entrepreneurs with the ability to get to the next stage. I know many nice venture capitalists, but I cannot tell you that many of them are motivated by the desire to pay back society or seek intellectual stimulation. :-)
5. Enable them to live vicariously. More on angel motivation: one of the rewards of angel investing is the ability to live vicariously through an entrepreneur’s efforts. That is, angels want to relive the thrills of entrepreneurship while avoiding the firing line. Thus, you should frequently seek their guidance because they enjoy helping you. By contrast, most venture capitalists only want to get involved when things are going really well or really poorly.
6. Make your story comprehensible to a spouse. The investment committee for many venture capitalists works like this: “You vote for my deal, and I’ll vote for yours.” That’s not how decisions are made by angel investors because the usual membership of an angel’s investment committee consists of one person: a spouse. So, if you’ve got a “client-server open source OPML carrier class enterprise software” product, you must make it comprehensible to the angel’s husband when he asks, “What are we going to invest $100,000 into?”
7. Sign up people that they’ve heard of. Angel investors are also motivated by the social aspect of investing with buddies in startups run by bright, young people who are changing the world. Even if the other investors are not buddies, investing side by side with well-known angels is quite attractive. If you get one of these guys or gals, you’re likely to attract a whole flock of angels too.
8. Be nice. More so than venture capitalists, angel investors fall in love with entrepreneurs. Often, the entrepreneurs remind them of their sons or daughters—or fill the position of the sons or daughters they never had. Venture capitalists will often invest in a schmuck if the schmuck is a proven money maker. If you’re seeking angel capital, you’re probably not proven, so you can’t get away with actling like a schmuck. Therefore, be nice until you’re proven—although I hope that when you’re proven, you’ll also realize that you should be a mensch.

Written at: Atherton, California.

Comments

[Edward Romanoff]

New industry not yet known in the U.S. Also scripts for 150 DVDs and movies, see www.motionmetrics.org

[PR]

I would like to offer an Angel Investor 5% of gross revenue paid quarterly for a fixed amount of time with a guaranteed bottom payout. Is this something anyone has tried and what kind of feedback have you gotten.

Thanks

[Randee Heller]

My name is Randee Heller with Heller Capital, located in Florida. I am currently working with an upscaled children's clothing line that is going on their third year with projected revenue of $400,000. for 2007. This company has been recognized by NBC (South Florida Today) and has featured this designer on air. In addition, this company was elected to give baskets to the academy award winning moms. This is a tremendous opportunity for an angel investor for the long hall!

P.S. kudos to the gentleman that posted this blog.

[Anewventure]

Hi, I enjoyed the post. Question: for folks with a sole proprietorship... what terms can you offer an angel?

Would an Angel accept something like a percentage of profits for x amount of time, based on casflow assistance needed throughout the same x amount of time instead of stocks, or debt conversion I have read about? again, we are a sole proprietorship.

I have a small business that is growing using it's own profit from sales, but we are interested in moving to retail chains, and need cash for manufacturing to support larger orders.

As a sole proprietor, what items do I work on to attract angels?

I was thinking of the concept of a loan, without an interest rate, but instead a guaranteed percentage of profits for x amount of time. Again, we currently are profitable, but small and realize that retail orders would require capital and some cashflow.

thanks -
L

[Roger Kenton]

Hello
I am an inventor and have a US patent on a new automobile product. I have started production and have generated some sales. I am looking for an investor who is interested in investing in a global marketing project to help my invention go big. If anyone is interested or knows someone who might, please contact me at roger@sellvisor.com
Thanks and Best Wishes

[Daniel]

Hi,

I'm o good man and always been a fair human kind and keep my word. I have a project about real estate. I'll start it but need about 300,000 $.
Invest in me and I promise you'll earn a lot and be companion for a few more projects that I have in mind.
E-mail me at:danblueangel@yahoo.com
Thank you.

[Ellie Brown]

Hello,

I am in the process of trying to publish a book and I need your help. It is for the project About My Sisters 1996-2006. I have been photographing my sisters’ passage through childhood, into and out of adolescence for ten years and find the work to be valid and socially significant on many levels beyond pure documentation. The work chronicles the quest for identity, changes in voice and confidence through adolescence, the strong influence of media and peer groups and an eating disorder.

As you may or may not know, funding for all the arts have been cut in recent years under our current administration and the effects have reached far and wide, even into art publishing. Most publishers require some financial input from the artists to be published. I have interest from Charta Art Books in Italy but they require 18,000 euros plus shipping to help with publication. I feel that currently my best option is to fundraise so that I may proceed with this venture. The funding will go directly to the publication, design, marketing and distribution of the book.

This book will serve to educate girls about issues of lost confidence, materialism, identity and eating disorders. I believe it has a strong potential for social change.

If you have any questions or want to see a sample of the book in progress, please don’t hesitate to ask. Please understand that publishing the book will be a slow process.
Below is the letter of support from the publisher.

Thank you for your time.
Best,
Ellie Brown

http://www.elliebrown.com

[Dorez]

This is excellent advice. But I would like to add that sometimes as an entrepreneur you have to be open to other ways of getting money (of course you may not have been referring to start-up companies). My daughter and I started our fashion business with assistance from family and friends. Then we found an 'investor' of sorts who didn't have cash, but was willing to help us with credit cards. It's not the ideal way to get started, but in our case, it got our company up and running and we're grateful for that.
- Dorez

[John Eddleston]

Hi, great site. I'm based in the UK but am looking for angel capital of £100,000 to start a new internet venture that has the potential to generate yarly income of one billion within five years.

[victor]

Can someone recommend me an angel investor please. I need to raise fund to start an IT consulting company in Singapore.

[Estela Flores]

Can someone help me to find an angel investor to develop a fashion project? I am a guatemalan woman an the idea is ...."Jeans and huipiles fashion" You can see huipiles in my site:
www.spanishgua.com/estelaflores

[Neomen]

Nicely done. I know a few Angels, and all of the above is true...

[TMP]

Can someone help me find angel investors willing to invest in fitness equipment. Where are the investors of consumer products. Great market.

Thanks.

[Nicole Wofford]

Greetings!

My name is Nicole Wofford and I currently reside in Reno, Nevada and I have been involved in the Storage Unit Auctions for awhile now and have closely studied the pros and cons of the operations and opportunities involved with owning operating Storage facilities. I am also an assistant to Dr. Robert Weems Former Dean of the University of Reno Nevada and a very Wonderful man at the Ripe age of 96. My relations with him has envoked ideas and increased knowledge on the things of antiquity. As we (as consumers) continue as a majority) Focus on newer and "high tech" "things" we will be further and further from the things we once thought dull and look back at the true beauty of antiquity. So I would like to receive more info from you regarding aquiring Angel investment from Parties interested in my vision and passion. profitability: extremely high. Sincerely

[mike]

looking for investors with around $300,000.

[Amrit Chera]

Great Post. Just when I needed it.

I would really appreciate if someone can point me to some Angel Investors in Canada.

Thanks,
Amrit
amrit.chera@eDistributor.ca
cell # 1.416.523.7000

[Kelowna-Real-Estate.com Editor]

Thank-you for this great article! I live in Kelowna, British Columbia, Canada - an absolute boom town for business start-ups, and I am interested in a any information, books, or links on this topic!

[mike]

looking for investors to help $ 800,000 is needed for clothing line & skin care.

[David S. Rose]

Guy, as usual, is 110% on target. Speaking as the chairman of one of the more active angel investment groups in the country ($14 million over the past three years), I can not only confirm every one of Guy's points, but think the advice is so useful that I'd like permission to include it on our website!

[Justin Lee]

Good stuff, it's very helpful. =)

[Chrystian Guy]

I needed that a year and a half ago!

Well, I notice that I was not that far off. I have just spent the last two years of my life financing a software venture of mine with angel caps and VCs. Very nice people... when you don't need them! But I have been lucky.

Anyways, since my book on the subject will be out in 20 years or more (!) I put a link to your recipe on my blog (french).

Thanks. I'm a recent but soon to be regular reader of your blog.

[Charlene Chong]

Guy, you wrote a great blog on the art of rainmaking and as I read this one about raising capital (angel or no angel), I recall asking a serial entrepreneur this. "What's the best type of capital to raise and how do I go about doing it?" The answer - REVENUE; SELL SELL SELL.

No one can argue with success.

[Dharmesh Shah]

I agree totally with all of Guy's points -- especially the last one.

I would also add one additional point:

9. Make it easy for the angel to invest. Often, simple terms are better than the "best terms". Angels are often creatures of convenience (at least I am).

[Asam Bashir]

If you are ever interested, we would love to have you come here to Cambridge UK and teach us a thing or two about the art of evangalising - right now the University is trying to evangalise the 800th Anniversary Campaign but the British aren't so good at asking for help,

(www.foundation.cam.ac.uk/800-intro.php)

Spring is a wonderful time in Cambridge, so this is a serious offer, we could arrange something very special, and you da Man we at Cambridge could learn somehting from.

[Geoff Maletta]

List of US/Canada angel groups and other resources on organized angel investing: www.angelcapitalassociation.org. Guy, since this post really focuses on individual angels, a follow-up post specifically focused on the subtleties of raising capital from angel groups would be valuable. There are many flavors of angel group and it is important that entrepreneurs understand the differences as they look for capital.

[Shaula Evans]

K beat me to it.

I don't know if it is the result of a conscious decision or an organic extension of your personal style, Guy, but your writing and your blog create a (rare) space where women are not only acknowledged, but by extension feel welcome and encouraged to participate.

I can't tell you how much I personally appreciate it.

Thanks very much.

[Doug Hanna]

Jeff,

Thanks for the links. I'll check them out.

- Doug

[K]

One of the things I find refreshing about this blog post is the subtle acknowledgment that there are female angel investors out there (#6).
There are, definitely there are.
Thank you for that.

[Matthew Wilder]

You know, I really should refresh to see if someone's question has been answered since I opened the page. I have had this page open for a while - tab browsint to research Ram, etc. I should add this one to my book of mistakes!

[Matthew Wilder]

Anon,

He had some Jewish colleagues when he was in the jewelry business.

http://www.guykawasaki.com/about/index.shtml

Matt

[Guy Kawasaki]

David,

My first real job was counting diamonds for a jewelry mfr in downtown LA. The company was owned by a Jewish family--hence my extensive knowledge of Yiddish!

Le chaim,

Guy

[Anon]

Guy,

Another great post. One question, though. You use more yiddish than most people I know. Any interesting influences?

David

[Jeff Jordan]

Douglas H.,

Here'sa list of all of the angel groups in the US: http://fundingutah.com/resources.php?resource=125

Also, Bill Payne of the Kauffman Foundation gives a killer two-part podcast on angel investors at http://www.fundinguniverse.com/podcasts.

Hope that helps.

[Douglas H]

How do you find angel investors? That's my question. I have a list of venture capitalists either my friends know or I've met, but no angel investors. Could you post about that?

[Cem Dalgic]

Don´t forget to mention the most important subject: UNDERCAPITALIZ(S)ATION!!

[Smittie]

I wonder what it must be like to have so much money that you can afford to invest in an unproven company for the sake of 'giving back' to society? Wow! That must be pretty awesome.

aloha

[BD Handspicker]

Thanks Guy! Great timing. How did you know we needed this advice today...

Hmmm... I'm not sure whether I should be more paranoid about the prospect that you're listening in on our latest entreprenuerial conspiring, or that Scott Adams might start channeling our new company in Dilbert again. ;^)

[Darren Fast]

Another great post. I particularly liked point #2. I work in biotech, and yes, the docs are potential angels for my clients, but some of the other guys have been too impatient for the biotech investments. It is truly important to match the investor with the opportunity so that it can be a successful long term relationship that can be win-win.

Thanks!

[Bizmonk MJ]

Hi There Guy,

I love this post.

Especially number 2 and number 6. I never thought off how doctors and dentist are not the right candidates just because they are rich. They have different ideas about money and different goals.

I also like the idea of making the story easy for the spouse to understand. Heh, I will keep that in mind.

Great post!

[Michael Sitarzewski]

Nicely done. I know a few Angels, and all of the above is true... maybe I should learn to *ask* for the money and their involvement? :-D