Riding on Angels' Wings
Business angels are investors in great ideas. They fill a capital gap between "friends and family" and VCs. Estimates of the number of angel investors in the US and Europe vary because there are no registration requirements. But the power of angels lies in the sheer number of companies they fund; some studies suggest angels invest in 10 to 20 times more companies than VCs.
Entrepreneurs usually raise money in discrete phases or "rounds" as a company grows. Angels individually invest between $25,000 ( £15,000) and $1.5m in a company; early-stage angel rounds with several investors typically start at $250,000-well below the radar screen of most VCs, who prefer rounds of $2m and above.
A GUIDE TO ANGEL INVESTMENT
Personal chemistry between angels and the management team is critical, as they are embarking on a long-term relationship.
If several investors are interested, it is better to invest as a limited liability company.
Get in at the right price. If the entrepreneur will not agree about the start-up's valuation relative to your assessment of comparable companies and of the entrepreneur's capabilities to grow the business, move on.
Angels who lead the due diligence process and sit on a board on behalf of other angels should be compensated with a small percentage of equity.
The best angel board members have relevant experience, not the deepest pockets.
Monthly or quarterly reports are essential and problems should be disclosed early.
Milestone financing is becoming more common. Investors set targets for the start-up that need to be met before another tranche of funding.
Diversify your risks by investing smaller amounts in more start-ups. Angel investments should be less than 10 per cent of your portfolio.
Articles on private capital
By Fred Wainwright, 08/15/2003, Financial Times, Copyright (c) 2003 The Financial Times. All Rights Reserved.
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