Monday, August 22, 2011

Angel Networks Help Start-ups Find Reclusive Investors

Angel networks have garnered a lot of publicity lately. In Minnesota, the Minnesota Angel Network launched with much fanfare. In California, AngelList continues to have great success. Why are these networks so important to start-up companies? Money. And because angels are often hard to find.

Start-up and emerging companies need money. They particularly need money during what is called the “valley of death.” This is the stage in a company’s development after completion of a prototype but before generating enough revenues from sales of products to keep the lights on. Companies need money to continue paying employees and paying the rent until the time they can begin selling to customers. Venture capitalists used to invest in pre-revenue companies during this stage, but have moved farther down the development spectrum to revenue-generating companies that are less risky. It is in this valley of death where start-up companies need angel investors who are willing to make a leap of faith.

Angel investors are individuals who have extra money available to invest in high risk, early-stage companies. Most qualify as “accredited” investors, which means that they have a net worth of $1 million or more or annual income of $200,000 or more ($300,000 with a spouse). $1 million isn’t what it used to be and a $200,000 income might not even cover tuition at a private college, so I won’t call these angel investors “wealthy.”

The challenge for start-ups is in finding angels. They don’t stand on the street corner with a sign that says “Angel Investor.” Angels are very reclusive and don’t want unsolicited calls from novice entrepreneurs or stacks of business plans from start-ups operating in industries in which they have no experience.

Because angel investors don’t want to be found, entrepreneurs who need money must spend a lot of time finding angels the old fashioned way—networking. The most successful capital raisers I’ve seen are the ones who are relentless. If you tell them no, they’ll ask you why and ask for the names of three more investors to contact. They pound the pavement until they’ve secured the funding they need.

Angels like to have a filter that eliminates the bad deals, and allows the good deals to get to them. This filtering process can be done through individuals such as entrepreneurs, founders, advisors, and professionals. Sometimes the greatest help I can provide a start-up is making an introduction to an investor.

Angel networks remove the inefficiency and time required in this process. In a network, angels sit idly by, waiting for an executive summary that catches their attention. The angel initiates and controls the communication. I expect that we’ll see more angel networks as the existing networks grow more successful.

All of this is a wonderful development for our entrepreneurial ecosystem. Good luck, Minnesota Angel Network. We need you.

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