This post is the first of seven posts about angel investment in entrepreneurial ventures.
There are many moving pieces when growing a business, and entrepreneurs have their hands full tackling the day-to-day business functions. As an enterprise grows, the operational pressures invariably increase and so often financing the growth of the firm from existing revenue streams become a challenge. When this is the case, entrepreneurs often seek outside investment from “angels” to provide the funds necessary for the next stage of growth.
The term “angel” is believed to have its roots in the arts and refers to those early benefactors of somewhat risky theatrical or artistic ventures (Amis & Stevenson, 2001). An early stage investor of an entrepreneurial endeavor is indeed an angel for the entrepreneur who might not otherwise be able to secure financing for business growth. Angel investors are often former entrepreneurs who understand the unique challenges of start-ups (Amis & Stevenson). Their past experiences and successes make them well suited to invest in other entrepreneurial ventures.
Each angel investor’s background and expertise provide a unique foundation for the types of investments they may seek. As a result, most will have a structured process and procedure for developing their deal flow. This approach to identifying and evaluating entrepreneurial projects in which to invest is often called “sourcing” (Amis & Stevenson, 2001). While there are likely as many approaches as there are investors, many will follow a process similar to the outline below.
1. Identify the Ideal Investment
Most angel investors will develop a one- or two-page fact sheet that identifies the type of investment they are willing to consider. This fact sheet outlines the key components of a deal including investment size, market opportunity, sector focus, and the experience and prior successes of the management team among other things (Amis & Stevenson, 2001). Because of the risk associated with an early-stage investment, it is highly likely the investor will want to be involved in the critical business decisions and therefore will want to invest in local companies (Brush, Edelman, & Manolova, 2012). Moreover, the investor will likely seek deals with a business type, or within an industry sector, where he or she has prior experience and success.
It is important for you, as an entrepreneur, to be aware of those individuals in your local area who have successes with a similar business or successes within your industry. These people have built credibility through their ventures and may well be possible investors in your entrepreneurial venture.
2. Network for Possible Opportunities
As a successful business person, an angel investor is likely to have a broad network from which they will look for potential investment opportunities. Many will openly share their desire to invest (and their “ideal investment” fact sheet) with those in their network. For most of these investors, their networking circle will include bankers, lawyers, accountants, venture capitalists, as well as other successful professionals who may have a history of investment in startups and small businesses (Wiltbank, 2005). An investor typically has high trust in his or her network and will rely upon these individuals when identifying, narrowing, and choosing entrepreneurial investment opportunities.
Keep in mind that some research suggests investments made in ventures found outside of an investor’s trusted business network (e.g. identified through a friends and family network) may well be less successful and could have a higher possibility of failure (Wiltbank, 2005). It is important, then, for entrepreneurs seeking investment to also network with bankers, lawyers, accountants and other professionals, as this may open more doors for possible investment. Networking outside of family and friends will increase the likelihood of an objective investment and should prevent harm to familial and personal relationships, which will sometimes occur when entrepreneurial ventures fail.
3. Prospect and Due Diligence
A variety of possible deals will materialize when an investor’s network is activated. The investor is faced with the task of sifting through those deals to find the opportunities that best match his or her ideal investment (Amis & Stevenson, 2001). Each angel is likely to have a highly individualized process for evaluating deal opportunities. In addition to financial due diligence, many will look closely at the venture’s structure, policies and cultural characteristics as it relates to the entrepreneur’s plan (Brush, Edelman, & Manolova, 2012). These factors are likely to predict the venture’s strategic readiness to accept the investment and scale appropriately to achieve the desired success for both the entrepreneur and the investor.
Entrepreneurs seeking investment should have already evaluated their company’s people, processes, and technology, as well as their organizational culture, for those improvements needed to ensure readiness for growth and expansion. Specifically, the venture must be strategically ready to accept funding and positioned ready to scale when investment occurs. (Brush, Edelman, & Manolova). The self-evaluation and the resultant activities deployed to demonstrate readiness may not ensure outside investment; however, it will show a potential investor that you, the entrepreneur, have the requisite skills and abilities to make the hard decisions necessary to grow the business. These actions may help you get funding at a later date.
Angels may engage in these and other steps in preparation for investment in entrepreneurial ventures. If you are an entrepreneur searching for early stage funding, it is helpful to consider how an angel investor may develop his or her deal flow. This knowledge will help you better identify possible angels who might bring relevant experience to your business and prepare your venture to secure outside investment successfully.
Amis, D., & Stevenson, H. (2001). Winning Angels: The 7 Fundamentals of Early Stage Investing. London: Pearson Education.
Brush, C. G., Edelman, L. F., & Manolova, T. S. (2012, April – July). Ready for Funding? Entrepreneurial Ventures and the Pursuit of Angel Financing. Venture Captial, 14(2-3), 111-129.
Wiltbank, R. (2005, October). Investment Practices and Outcomes of Informal Venture Investors. Venture Capital, 7(4), 343-357.
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