How To Finance A Business With Angel Investors

Individuals step in where banks, venture funds fear to tread.

The landscape for financing early-stage companies continues to evolve along with the rest of our economy. As venture capital funds have grown in size over the past decade amid a significant influx of money from institutional investors, so has their appetite and need to deploy greater amounts of capital.

This sounds like a good thing at first for those of us wanting to raise money for start-ups. Unfortunately, seed and early-stage funding from VCs has increased very little over the past 10 to 15 years in absolute dollars, so there is a lot more competition in today's market for a limited pool of capital.


In general VCs have moved upstream seeking less risky later-stage deals where they can deploy larger amounts of money. As the recession has delayed exits from venture investments via initial public offerings, many VCs are being forced to allocate capital for existing portfolio companies, instead of making wholly new investments.

What does all this have to do with angel investors? Plenty.

Angel investors and angel groups have grown in number and become more formal. There is no substitute for many entrepreneurs to tapping the assets of friends and family. Angels, however, offer an alternative for financing start-ups and early-stage companies in need of a few hundred thousand to a few million dollars.

The biggest challenge for many angel groups today is accessing capital; they are funded by high-net-worth individuals, many of whom are sitting on the investing sidelines. Nonetheless, angel investors and groups are active and a viable alternative for start-up capital.

Who are these angels and how are they organized? Each angel group has its own investment approach and ideas about how it can help--or not help--in building your company. It is important to note the difference exists between wealthy individuals who are willing to invest in a start-up and actual angels. The latter group have not only capital to put at risk but a track record of routinely investing in early-stage companies.

Angel groups tend to take on the personality of the lead angel on their teams. Understanding the idiosyncrasies of the investors is important in finding the right fit. Remember: It's not just about the money. From their "Note on Angel Investing," Professors Michael Horvath and Fred Wainwright of the Tuck School of Business at Dartmouth College characterize angels as follows:

--Guardian Angel: has relevant industry expertise and contacts and will be active in helping the start-up grow and achieve success. We would expect this investor be a value-added board member.