What is a Business Angel? (Part Two)
By John K. Romano
What are the characteristics of an angel?
Various surveys and research reports have yielded some interesting characteristics for identifying business investor angels. Although the exceptions probably all over rule the norm, the profiles provide some interesting food for thought: More than 90% are male.
- Typical ages are from 40 to 60 years old.
- They generally hold masters or multiple advanced degrees.
- They have prior startup experience.
- They have personal incomes between $250,000 to $1,000,000 a year.
- They invest at least once a year, with an average of 2 1/2 times a year.
- They invest $25,000 to $50,000 per deal, totaling hundred and $130,000 a year.
- They seldom take more than 10 percent of the deal.
- They seek a minimum of 20 percent compounded per year return.
- They expect liquidation in 5 to 7 years.
- They have a strong preference for manufacturing deals.
- They like technology that they're familiar with.
- They prefer startups or early stage companies.
- They dislike moderate growth.
- They like to play a consulting role, board of directors/advisors.
- They like to invest with other sophisticated investors.
- They like to invest close to home ( within 50 to 300 miles).
The primary investment motivation is a high rate of return. Secondary motivation is capital appreciation. Angels learn of investment opportunities from associates and friends. Less than 30 percent see and refer investments they make to their own investment peer network. Contrary to venture capitalists, angels don't rank comprehensive business plans at the top of their criteria list. However, they rank management ability the highest, and seek a clear, demonstrated market need, plus a large market potential for the product or service.
Typical questions investors will generally ask
The business owner should try to imagine the investors' point of view. After all, it is their money that is at stake. Investors have certain concerns and expectations that must be addressed if the prospectus and the offering circular are to be favorably received. Angels usually work from a business plan, not a prospectus, since a prospectus or private placement memorandum generally doesn't have the forward-looking statements that a business plan has. Ambition and an optimistic outlook are important to the success of an offering, but investors tend to be skeptical of promises that sound too good to be true. The most obvious question being, "Can these guys do what they say they can?" The prospectus is, in many ways, a sales brochure, too. But, for legal reasons, it should also be an accurate account of the company's progress and development. If the entrepreneur is going to do a DPO (an offering done without a stockbroker), that is, ask people he has never met before for money, then a prospectus is necessary.
Below are some the most common questions investors expect to have answered within a prospectus or a business plan. All of these questions are addressed in the U-7 form (the legal form used in a securities offering) as well as other commercially available software templated business plan packages.
- Why did you start your company?
- Where do you see your company going?
- What problems do you see your company encountering?
- What do see as your company's main markets?
- How do you plan to capitalize on those markets?
- Who is your competition?
- How do you plan to handle your competition?
- What have you invested in the company?
- Has the company met its projections?
- How did you arrive at your financial projections?
- If the company has not met its projections, why not?
- When do you expect to meet the projections?
- Who does your accounting?
- Who does your marketing and advertising?
- What is your company's short-and long-term business plan?
- Where you see the company in five years?
- In ten years? (note this kind of forward-looking statement may not be allowed in certain states under an offering).
- What are your criteria for site selection?
- Who is your customer?
- How many employees do you have, and what do they do?
- What additional personnel do you feel will need to be hired, and when?
- What is your overhead?
- Who are your suppliers?
- Do you have long-term contracts with your suppliers?
- What is the value of your company, and how did you arrive at that value?
- What are the amounts of your loans payable?
- How does the company plan to use funds from this offering?
- When do you think your company will need financing, and how much?
- What is your company's "system"?
- How does that system differ from your competitors?
- How do you view the role of the Board of Directors in relationship to the company's management?
- Describe your employee benefit plans.
- Who is in charge of research and development?
- How is research and development conducted?
- What is the stability of the company?
- How are your expansion plans going?
- How many stores do you plan to open this year?
- What are your hours of operation?
- What is the rent on your present office space?
- How long is your lease?
- What is the seasonability of the company's business?
- What type of growth have you seen in your industry?
If your trying to raise money the odds of you raising money from an Angel living in your community are much better. Most entrepreneurs don't have the high quality connections and contacts to Wall Street and the Venture Capital Communities around the nation. Chances are professional financiers may more likely live near Silicon Valley, New York, or Boston. However, the Internet is here, that means it is easier for you to find angel you need on-line. Through the power of the Internet it is now much easier to find these people through various on line capital matching services or websites dedicated to capital formation for small business.
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