When it comes to business financing, the past two years have had
a Wild West feel to them. There were companies funded by venture
capitalists and taken public in a matter of months, firms whose
valuations soared heavenward at light speed, and entrepreneurs in
their twenties cashing in on ventures they founded in their dorm
rooms.
Then reality hit. Venture capitalists slammed on the brakes, and
banks snapped their purse strings shut. Now hundreds of young
companies and would-be entrepreneurs are left with start-up and
expansion hunger pangs and no clear idea how to satisfy them.
While firms that are more established can turn to the $5
trillion in nonventure private equity available from
brokers/dealers, private bankers and qualified institutional
buyers, start-ups—especially those not located in the
traditional investment hotbeds—will likely need to fall back
on an old standby: the $30 billion angel investor arena.
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The good news is, today's angel investors are much easier to
find than their predecessors, because a growing number of them have
created formal and informal networks. Even more encouraging is that
a number of these groups are popping up in nontraditional
regions.
According to Carol Sands, founder of Angels' Forum
LLC in Palo Alto, California, these angel funds or networks
fall into three basic categories:
1. There are "social clubs," which bring angels
together to view a high volume of companies and then allow
investors to execute their own investment deals. This format is a
little less personal, and it places the onus on entrepreneurs to
make presentations that stand out.
2. There are those that are organized and run like funds, where
angels put up a certain dollar amount upfront and one individual
manages the process and selects companies to present at regular
meetings. Sands says these groups typically invest as a single
entity but don't do follow-up work with the company; their only
interest is the cash-investment relationship.
3. The final format, into which Angels' Forum falls, is a
fund that utilizes a venture capital structure and process, but
instead of investing other people's money, they invest their
own. These groups invest in companies as a single unit, typically
require a board seat and provide continuous assistance. For
instance, at Beverly Hills, California-based Idealflow Angel Fund
LLC, which targets technology companies nationwide, assistance
comes in the form of a "virtual incubator."
These are the basic structures of the new networks, but there
are also hybrids like Arizona Angels Investor Network Inc.
According to Greg Cobb, managing director of the Scottsdale,
Arizona, network, entrepreneurs interested in securing funding from
his group must find a lead investor, who doesn't have to be a
member of the network. That person handles due diligence,
negotiates on behalf of interested investors, and is responsible
for taking care of the LLC formed to invest in the business.
For more information on nontraditional angel financing, check
out "Angel Funds
and Networks".
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