Tuesday, October 5, 2010

Can Angel Investing Work for Me?

Financing Your Business via Angel Investors

David Plucinsky, SCORE counselor and international financial expert, provides some focus on Angel investment. Many SCORE clients ask about this, hopeful of locating a person who is interested in funding their venture. This article provides background material; the next will cover the process and what Angel investors seek when examining an opportunity.

Angel investors are typically successful business people who have made money in life and look to deploy a certain amount of their wealth backing start-up and early stage businesses. They are accredited under SEC Regulation D, Rule 501, meaning that they pass a wealth test. This is important to entrepreneurs as it means you can engage with them without having to provide the substantial documentation required by the Securities and Exchange Commission if the investor does not meet the requirements of Regulation D. Anytime you speak to potential investors in your business, you must determine if they are accredited. Angel investors generally invest in industries they know well, for example software, oftentimes where they made their money. Many like to bring not only money to the table but also their experience, a valuable resource when utilized properly.

Professor Jeffrey Sohl of The Center for Venture Research, University of New Hampshire provides the following information. In 2009 57,225 entrepreneurs received $17.6 billion from 259,480 active Angel investors. From this we can infer that the average investment was $307,000 and the average amount invested by an Angel was $67,800, meaning that the entrepreneur was funded by 4 to 5 angels. Software ventures received 19% of this investment, healthcare 17% and Industrial/Energy 17%. Of the amount invested, 35% went to start-up companies, 62% to early stage and expanding companies, those already in business with a product or service. The yield rate was 14.5% meaning that for every seven business plans that made it to full review, 1 received funding. Women accounted for 21.3% of all requests for funding, 9.4% of these were successful. Minorities represented 6.2% of entrepreneurs requesting money, 14.5% being successful. With respect to minority applications, it is interesting to note that the yield rate was the same as the overall average, this means that minorities applied much less for funding, however when they did, they had the same success rate, one out of seven. This is not the case for women whose 9.4% yield rate was some 5% behind the average.

In today’s market, Angel investors band together in what is called a network. A network has a leader who manages the process of finding companies seeking funding, creates the review disciplines, locates investors interested in funding companies and brings them together.

An upcoming article will examine the process of obtaining Angel investment.



Richard Strug
Greater Princeton Area SCORE (Chapter 631)
Serving Mercer and Middlesex Counties