Angel Investing

Frequently Asked Questions

 FAQ ON ANGEL INVESTING

What is an angel investor?

What are angel groups?
How do I find an angel group?
What is the difference between angels and Venture Capitalists?
How do I know my business is right for an angel group investment?
When should I approach an angel group?
What criteria do angel groups use to select entrepreneurs?
What process can I expect if I apply to an angel group for funding?
Will angel groups sign non-disclosure agreements? If they don't, how do entrepreneurs protect
confidentiality?
Should I expect to pay fees to participate in the screening process or to present to an angel
group?
Are there other information resources?

What is an angel investor?

An angel is a high net-worth individual who invests his or her own money in start-up companies
in exchange for an equity share of the businesses. ACA recommends that entrepreneurs work
with investors who are accredited investors (who meet requirements of the Securities and
Exchange Commission) and who can add value to the company via high quality mentoring and
advice. Other important things to know about angels include:

Many angels are former entrepreneurs themselves

They make investments in order to gain a return on their money, to participate in the
entrepreneurial process, and often to give back to their communities by catalyzing economic
growth.
Angels make a return on their investment when the entrepreneur successfully grows the
business and exits it, generally through a sale or merger
It is estimated that angels invested 19 billion in more than 55,000 start-up businesses in 2008
(Source: Center for Venture Research)
Angels tend to invest in companies that are located near them regionally (or to co-invest in a
wider geography if a local investor they know and trust is involved)
What are angel groups?

In an angel group, individual angels join with other angels to invest collectively in
entrepreneurial firms. Angel organizations come in many forms, but all have certain
characteristics:

They meet regularly to review business proposals

Selected entrepreneurs make presentations to the membership of the group
Member angels decide whether to invest in the presenting business
Angels work together to conduct due diligence to validate the plans, statements and history of
the entrepreneurial team

Other points of interest about angel groups are:

The size of angel group investments in entrepreneurial firms varies widely. A survey of member
organizations of our companion organization, the Angel Capital Association, found that the
median investment per round per angel group in 2008 was about $277,000. Many angel groups
co-invest with other angel groups, individual angels and early-stage venture capitalists to make
investments of $500,000 to $2 million per round.
Groups invest in innovative firms in a range of industries. The most common areas are software,
medical devices, telecommunications, and manufacturing.
While some groups focus on a specific industry area, the majority are open to a variety of areas
and select those markets with which some of their members have expertise

How do I find an angel group?

Review the ACA Member Directory to find an ACA member angel group in your region. Click
through to individual angel group websites to learn about their investment interests and
processes.
You will find a longer list of angel groups on the Angel Capital Education Foundation Web site
Listing of Groups page.
Because some angels and angel groups are more likely to invest in firms that are recommended
by people they know and trust, it is important to network in your community to gain a referral.
Examples of people to contact include: entrepreneurs who are backed by angels or venture
capitalists, attorneys who specialize in equity investment bankers, accountants and business
counselors
What is the difference between angels and venture capitalists?

While both invest in entrepreneurial firms and take equity (ownership) in those businesses,
there are some important differences:

Funding source- Angels invest their own funds directly in a business, while venture capitalists
invest funds from other sources (e.g. pension funds, insurance companies, foundations.
Stage of entrepreneur - In general, angels invest in seed, start-up and early-stage businesses,
while venture capitalists invest in later-stage businesses (although there are exceptions).
Size of investment - Venture capitalists generally invest $2 million and up in a financing round,
while individual angels make much smaller investments ($5,000 to $100,000). Angel groups can
make investments in the mid-range, between most individual angels and VCs.

How do I know my business is right for an angel group investment?

Angel investment is the right source of funding for only a small proportion of entrepreneurial
businesses. When considering yourself for investment by an individual angel or angel group,
ask yourself these key questions:

Am I willing to give up some amount of ownership and control of my company?

Can I demonstrate that my company is likely to realize significant revenues and earnings in the
next 3-7 years?
Can I demonstrate that my company will produce a significant return for investors?
Am I willing take the advice from investors and accept board of director decisions I may not
always agree with?
Do I have an exit plan for the company that may mean I'm not involved in 3 7 years?

When should I approach an angel group?

In general, the best time to seek angel funding is when:

Your product is developed or near completion.

You have existing customers or potential customers who will confirm they will buy from you.
You've invested your own dollars and exhausted other alternatives, including friends and family.
You can demonstrate that the business is likely to grow rapidly and reach at least $15-30 million
in revenues in the next 3-7 years.
Your business plan is in top shape.
What criteria do angel groups use to select entrepreneurs?

No two groups are exactly alike, but generally groups expect to at least see the following:

A strong management team with experience and proven skills.

Unique product or service distinguished by an identified competitive advantage and large
market
Your personal financial investment in the company and investments from your friends and/or
family
A clear picture of the market for your product or service and realistic plan for market penetration
An exit strategy for the investor that is reachable within 5 to 7 years
The potential for a strong return on investment

What process can I expect if I apply to an angel group for funding?

Angel groups follow several stages of review in order to make funding decisions. Below is a
listing of these steps. It is important to recognize that groups may conduct these steps in a
different order than is presented here.

Application Check with the angel groups Web site to determine what documents are required
initially. Many groups want the executive summary of your business plan, while others have an
application form.
Pre-Screening When the angel group receives a completed application, staff or a committee of
members reviews it quickly to determine if it meets the groups general requirements. The pre-
screening will eliminate applications that are incomplete, don't meet the organization's minimum
requirements, or does not comply with the investing preferences of the organization. Expect one
or two weeks for the pre-screening process.
Screening Once an application has been accepted for review, a group of staff and angels
review and further define the opportunity. If the entrepreneur passes muster at this stage, the
organization may select a "champion" for the opportunity and create a due diligence committee.
The angel group may ask for your full business plan in this stage and some groups hold
meetings with the entrepreneur during this stage. In general, about 10 to 25 percent of all
entrepreneurs who apply reach this stage. Screening is usually completed within another one to
three weeks.
Investment Meeting The entrepreneur is invited to make his or her pitch at a meeting of all
members of the angel organization. A question-and-answer session follows the founder's
presentation. Members discuss key issues about the company and determine initial interest in
making individual or group investments after the entrepreneur leaves the meeting. Such
investment meetings are usually held every month or two.
Due Diligence A team of members interested in investing and specialists with knowledge of the
industry under consideration conduct a thorough check on you and your business. The objective
is to validate the business plan, including the management team, market opportunity and
amount of funding required, and to negotiate a term sheet, thus placing a value on the
investment. A further cut is made: 25 to 50 percent of the companies that reach this stage are
actually funded, and the process can continue for two weeks to several months.
Term Sheet If the group chooses to invest in your company, they will negotiate with you a term
sheet, a document that guides lawyers in preparing investment agreements and which
determines the relationship between the company and investors. Sometimes angel groups will
begin term sheet negotiation during Due Diligence. For more information on standard term
sheets, other investment documents, and issues to consider, click here or visit the Books page
on this website.

Will angel groups sign non-disclosure agreements? If they don't, how do

entrepreneurs protect confidentiality?

During the initial portions of the evaluation process, the vast majority of angel organizations will
not sign non-disclosure agreements. Angel groups just see too many deals, often in a similar
space. When submitting executive summaries and even business plans, the entrepreneur
needs to explain the business so that the potential investors can understand the company's
opportunity for success, but don't learn about any confidential issues. If you have intellectual
property that has not been patented, it is best not to disclose it to the angel group when you are
first submitting your company for investment. Remember that angel groups are most interested
in the business behind the technology or idea they don't invest in the inventions but in the
business models and management teams that will grow the companies. If your company makes
it through to final due diligence, the angel group may need to research intellectual property
issues and then would sign non-disclosure agreements at that time.

Should I expect to pay fees to participate in the screening process or to present

to an angel group?

In 2008, ACA recommended that angel groups charge entrepreneurs no more than nominal
fees for applying for and/or making presentations for angel capital and that all fees are fully
disclosed, ideally appearing on the group's Web site. The fees should be no more than a few
hundred dollars for applications and no more than $500 for presentations. Transparency to
entrepreneurs is of utmost importance, so full information about fee amounts and what the fees
are for should be included on the groups home page and/or other prominent portions of the site
 and other important promotional materials. Angel groups should also provide a consistent
program of high quality coaching, preparation and feedback to entrepreneurs participating in
screening and presentation activities.
These guidelines match the practices of the great majority of ACA member groups, based on a
2008 survey. About than two-thirds of responding members charge no application or
presentation fees, and the other third mostly charged nominal fees. The survey results are listed
below. ACA will also pursue developing a database on member group investment practices,
including fees, on our Web site to search and review by entrepreneurial ventures. ACA is an
inclusive association that welcomes membership from any angel organization meeting the
application criteria, but it does not endorse the practices of any group that levies large fees
and/or does not forthrightly explain its potential fees to the entrepreneurial community.

Summary of Survey Responses on Charging Fees to Entrepreneurs

February 22, 2008:
Total survey responses - 82
Do you charge any fees?

Yes 31 (37.8%)
No 51 (62.2%)

If you charge, at what stage and how much?

Application Fee
o 18 groups charge
o range of fees is $55 - $250
o average = $151
o median = $125

Presentation Fee
o 17 groups charge
o range of fees is $175 - $750, with two outliers at $1,500 and $3,00
o average = $580
o average without outliers = $338
o median = $400

Are there other information sources?

Angel Financing for Entrepreneurs: Early-Stage Funding for Long-Term Success, by

Susan L. Preston. Published in 2007 by Jossey-Bass. ISBN number: 978-0-7879-8750-3
Angel Investing: Matching Start-up Funds with Start-up Companies (Guide for
Entrepreneurs, Individual Investors and Venture Capitalists), by Mark Van Osnabrugge and
Robert Robinson. Published in 2000 by Josey-Bass. ISBN number: 0-7879-5202-8
The Definitive Guide to Raising Money from Angels, by William H. Payne. Published in 2007
by Bill Payne and Associates. Available via www.billpayne.com.
Every Business Needs and Angel: Getting the Money You Need to Make Your Business
Grow, by John May and Cal Simmons . Published in 2001 by Crown Publishing Group. ISBN
number: 0-609-60778-2
Finding an Angel Investor in a Day, by The Planning Shop and Joseph R. Bell. Published in
2007 by The Planning Shop. ISBN number 0-9740801-8-7
How to Raise Capital: Techniques and Strategies for Financing and Valuing Your Small
Business by Jeffry A. Timmons, Stephen Spinelli and Andrew Zacharakis. Published in 2005 by
McGraw-Hill. ISBN number: 0071412883
How to Write a Great Business Plan, by William A. Sahlman. Published in 2008 by Harvard
Business School Press. ISBN number: 978-1422121429
New Business Ventures and the Entrepreneur, 6th ed., by Michael J. Robert, et. Al.
Published in 2007 by McGraw-Hill. ISBN number: 978-0073404974
New Venture Creation: Entrepreneurship for the 21st Century, by Jeffry A. Timmons and
Stephen Spinelli. Published in 2008 by McGraw-Hill/Irwin. ISBN number: 978-0073381558

Web sites & Other Sources:

Kauffman Foundation Entrepreneurship.org - This site includes valuable information for

entrepreneurs interested in growth, including a collection of articles, tools, and templates on
pitching angels. The site includes a special section on valuation of pre-revenue companies.
American Heritage Invention and Technology - This quarterly online magazine is dedicated to
the history of technology
Angel Investor News - This site includes background on angel investing and has an entire
section on preparing business plans and presentations.
Inc Magazine - Contains articles and practical advice for entrepreneurs interested in obtaining
angel funding.
National Association of Investment Companies - This association of venture capital firms that
invest in minority owned firms offers special insights.
Red Herring Weekly magazine dedicated to the business of funding, building, and taking new
technologies to market.
Small Business Administration - A good introduction to starting a business and writing your
business plan.
SCORE Counselors to Americas Small Business is a nonprofit association connected to the
Small Business Administration. Focused on educating entrepreneurs, its mission is to
encourage the formation, growth, and success of small business nationwide.
Technology Review - Bimonthly magazine owned by MIT and focused on new technology and
how it gets commercialized.
The Business Mentor - The entrepreneurs business planning advisor on CD-ROM.