2x Partners: Angel Investors 101

While attending the Stonyfield Institute, lawyer (and good friend of the firm anyway!) Steve Palmer provided some info on:

How the term angels came to be/what they are
How you find them
What they want

Steve was good enough to provide some notes below:

ANGEL INVESTORS

(Those of you who are Biblical scholars might like to think of angel investing in terms of “manna from heaven”)

Overview

I. What are angel investors?

II. How do you find them?

III. What do they want?

I. What are angel investors?

– One possible answer: Anyone who will give your venture some money!
– The term “angel investor” was first used to describe wealthy individuals who helped to fund Broadway productions.
– In 1978, William Wetzel of the Center for Venture Research of the University of New Hampshire started using the term the way we think of it today.
– Because each angel investor is different – and because angel investing in general has changed over the years as we will learn in a moment – what I am saying about angel investing are generalizations.
– Originally, angel investors were high net worth individuals who made investments with their own personal funds in early stage ventures – typically as a second stage investment after founder or friends and family rounds.
– Often they were entrepreneurs who “cashed out” and wanted to invest in new enterprises.
– In the late 1980s, angel groups or angel networks began to form where groups of high net worth individuals pooled their money to make investments. They have investment criteria, review committees and often professional staff. There are now at least 300 such angel groups in the U.S. – and probably more.
– One of the larger groups in this region is “Common Angels” in Boston, which was formed in 1998, and which generally has an IT investment focus.
– These angel groups and networks have moved angel investing along the spectrum to look more like traditional venture capital financing.
– But there are still plenty of traditional individual angel investors out there and actively investing. One estimate puts the number of active angel investors in the U.S. in 2007 at over 250,000.

II. How do you find them?

– Just like “real” angels, you often can’t see them.
– It is easier to find “angel groups” these days using search sites such as Google, Yahoo or Bing or by using resources such as the Angelsoft network. Angelsoft network, which you can find at angelsoft.net, was formed in 2004 and provides web-based deal flow management software to angel investors and provides a forum to introduce entrepreneurs to potential sources of angel funding.
– Identifying the traditional type of individual angel investor is a bit trickier.
– One way to find them is by attending events such as this and by networking. I have a feeling there may be an angel investor or two in this room right now. But be kind – lest they disappear!
– Ask other entrepreneurs.
– Ask your advisors.

III. What do they want?

– Remember, they may be angels, but they are also investors. Like any investor, they want a return.
– As early stage risk investors, they’d like a big return – something on the order of 10x, 20x or even more over a 5 year horizon. And like other investors, they certainly don’t always get it!
– They want you to succeed! Many angel investors, in addition to giving you money, want to be your mentor. They like to share the benefit of their experience and their contacts.
– Many develop a strong personal interest in and connection with your company – and you.
– They often have knowledge and interest in your industry and can be good sounding boards.
– In general they are more likely to be “hands on” than passive investors, but are less control oriented than VCs

IV. Closing

I started with a Biblical reference, so I’ll close with one from pop culture. If you are a fan of It’s a Wonderful Life, now you know that every time you hear a bell ring, not only has an angel gotten his or her wings, but has made an investment in a company like yours!

Provided courtesy of:

Stephen L. Palmer | K&L Gates

State Street Financial Center, One Lincoln Street, Boston, MA 02111

(617) 951-9211 direct | e-mail: stephen.palmer@klgates.com