Every Business Needs an Angel: Getting the Money You Need to Make Your Business Grow
256
Every Business Needs an Angel: Getting the Money You Need to Make Your Business Grow
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Overview
business off the ground or keep it running.
However, many entrepreneurs have a problem. On one hand, the traditional sources of financing—family, friends, personal savings, the local bank—are often inadequate. On the other, the venture capitalists who have played such an important role in the high-tech industry are interested only in investing much higher sums than most entrepreneurs need.
Enter angels: a new type of investor looking to invest between $100,000 and $1,000,000 in a company. There are about three million angel investors, and there’s a huge market of entrepreneurs and would-be entrepreneurs who want to learn how to attract angels’ interest—and their money.
John May and Cal Simmons are at the forefront of this trend. Not only do they have years of experience in advising, managing, and investing in early-stage companies, they are also the originators of The Dinner Club, a Washington, D.C.–based group of successful businesspeople who hear pitches by entrepreneurs seeking funding and then decide whether to invest their own or the club’s money in those entrepreneurial ideas.
Every Business Needs an Angel offers a fly-on-the-wall look at how angel investors evaluate new entrepreneurial ideas, and provides a wealth of practical advice and insight for the countless entrepreneurs seeking help in their quest to find investors for their businesses. The book covers all phases of the process of finding angels and persuading them to invest, drawing on many examples of real-world companies that have pitched angels successfully—as well as unsuccessfully. These entrepreneurs are in a broad range of industries—from high-technology companies to more traditional businesses as diverse as breweries and concierge services—some quite well-known, like Nantucket Nectars and Preview Travel, whose founders had their own guardian angels.
For entrepreneurs who need money and advice on how to find it, the authors offer enormous insight into this new breed of investor. As the title says, every business needs an angel; this book tells you how to find one.
Product Details
| ISBN-13: | 9780609504475 |
|---|---|
| Publisher: | Crown Publishing Group |
| Publication date: | 12/18/2001 |
| Sold by: | Random House |
| Format: | eBook |
| Pages: | 256 |
| File size: | 748 KB |
About the Author
Cal Simmons is a longtime angel investor with extensive experience in early-stage private equity. He has invested in more than thirty early-stage companies and is cofounder and manager of several angel investing clubs, including The Dinner Club, eMedia Club, and Washington Dinner Club—all of which are early-stage venture funds that leverage the capital, expertise, and relationships of angel investors to identify, invest in, and grow promising young companies. Prior to his angel investing career, he was a successful entrepreneur, having founded Cal Simmons Travel, which he sold to a public company, and he recently founded ASAP Ventures, a small business incubator. He is a current member and past chairman of the Washington-area chapter of the Young Presidents Organization (YPO).
Read an Excerpt
Inside "The Dinner Club": How Angels Evaluate Entrepreneurs
For many entrepreneurs, angel investing has a certain mystique. There simply is not a lot of public knowledge about how business angels function. In this book, we hope to lift that veil of mystery and clearly explain what it takes to obtain angel investment in a fledgling business. To do that, we will rely on firsthand accounts from both entrepreneurs and investors relating their experiences and their advice.
As mentioned in our introduction, many of our stories come from the experiences we have had as managers of an early-stage investment group called the Dinner Club. These sixty investors meet monthly to listen to pitches from entrepreneurs and then, as a group, evaluate the companies' prospects and determine whether to make an investment. New CEOs and wannabe entrepreneurs frequently ask us about how groups operate, what the meetings are like, how angels make decisions, and the unwritten rules of the game. To answer these questions, we're going to give you a "peek under the tent," taking you inside a composite Dinner Club meeting.
The surprising thing is that this process is being repeated daily in communities across the country, with structured angel groups popping up coast to coast. Yet few entrepreneurs are aware of what it takes to break down the barriers and gain access to what appears to be a "members only" environment. Throughout this book, we will show you the insiders' view and share with you secrets on not only how to find angel investors but, once you've found them, how to convince them to underwrite your great new idea.
The Monthly Meeting: Getting Started
It's 5:30 on a Monday evening, and rush-hour traffic has snarled all the approaches to Tyson's Corner in northern Virginia, the heart of the high-tech boom outside Washington, D.C. Members of the Dinner Club are due at a private dining room at Maggiano's Little Italy, a family-style eatery famous for large portions and noisy conviviality. As managers of the club, we're responsible for making sure the monthly meetings go smoothly, and now it looks as if rainstorm-slowed traffic is going to create snags.
But we're used to it, as is everyone else. This part of Virginia has become a New Economy boomtown, with all the ills and advantages of a fast-growing, commercial hub. A recent Fortune magazine story claimed that the Tyson's area contained more office space than all of downtown Washington, that more people worked in information-technology companies than for the government, and that there were more software engineers in the area than lawyers.
The main highway of the area is Route 267, the Dulles Toll Road, a rolling superhighway that stretches from the Washington Beltway to Dulles International Airport and slices through canyons of towering glass and chrome. This has become the main artery of our nation's capital for the telecommunications, networking, and Internet industries. The neon logos on top of the buildings announce only some of the companies: Nextel, Teligent, PSINet, Ciena. And nearby, there's AOL, WorldCom, and Network Solutions, to name a few of the biggest players. This nest of information-services companies may not yet have acquired a name like California's Silicon Valley or New York's Silicon Alley, but it's still got plenty of character and color.
The traffic jam that comes with growth is a mixed blessing for our group, being a sign of prosperity but making it a lot harder to get quality meeting time. We've told our presenting entrepreneurs that it's important that they arrive early so they can mix and meet with our members during pre-dinner drinks. And we know they probably want to get a sense of the room and its layout before making what could be a life-altering pitch. They've been coached and given directions, and appear ready. We enter the room reassured--one of the presenters is already hooking up his slide show; another is chatting with several members at the bar.
One of our key associates, Anne Lord, is handing out name tags at the registration tables and offering members copies of executive summaries from tonight's presenting companies. She's also distributing reprints of a recent feature article in Forbes ASAP magazine about angel investing in America. The article profiles several angel groups around the country and includes an in-depth interview with us about the Dinner Club. The article also describes the different types of angels that make up the typical angel investing group (see Exhibit 1-1).
We're especially pleased about the Forbes article for a variety of reasons, starting with the mention of our club as one of the leading angel groups in the country! It confirms what we've been suspecting: Angel groups are popping up everywhere. The article reports at least fifty such organizations. It emphasizes that angels prefer companies close to home, and that this is more a grassroots, local movement than a national network. The details it offers about angel groups adding affiliates in areas like western Connecticut; Hilton Head, South Carolina; and Tucson, Arizona, attests to the vibrancy of angel investing as a new segment in the country's private equity markets.
As the room fills up, members seem a little more alert, a little more eager than usual. Loud voices and bursts of laughter punctuate the constant chatter. At one table, several members talk about the success that one of our portfolio companies is having attracting interest from a major venture capitalist to lead its next round of funding. Although all of us are seasoned investors, there's still great comfort when the professionals, like a mainstream VC, validate our judgment and back a company that we like. The VC lead could also mean that the value of our investment will shoot up.
Another hot topic among members is an upcoming vote on a company that presented to us last month. The due-diligence committee of club members has finished its report, and the club is ready to vote. We've also received proxy votes from members who aren't here. Although most members know that the committee report is positive, there are no sure things in our club. Members have lingering questions about the prospective investment, and those answers could turn the decision either way.
And of course, the subject of the stock market's gyrations pops up here and there. Members are especially shaking their heads in amazement at the recent plummet of a local company, MicroStrategy, and the falling fortunes of its CEO, Michael Saylor, whom many of us know. The news that the company had to restate earnings for the past year chopped Saylor's net worth from $12 billion to $2 billion in less than a week. The room is also bubbling with gossip and news surrounding a local merger--AOL and Time Warner. And one of our members, Jonathan Legg, a broker with Morgan Stanley Dean Witter, is encircled by members wanting his take on upcoming IPOs. About forty-five members have now arrived, joined by six or eight presenting executives, who usually bring along two or three people from each company, such as the CEO, finance officer, and technology expert.
The Meet-and-Greet: Entrepreneurs Mingle with Potential Investors
A little after six o'clock, waiters enter the room, their shoulders stooped with large trays covered with salads and bread baskets. Scattered around the room are eight round tables, each seating seven or eight people. People sit anywhere; everyone has a clear view of the screen in the front of the room. No pre-assigned seating arrangements are made. However, we ask employees of the presenting companies to spread out so they will talk to members, not just each other. We want to keep the atmosphere as informal and friendly as possible. Sure, there are a couple of business suits in the room, but they're a minority. Sports shirts and khakis appear to reign. Presenters, however, are loaded for bear and have coats and ties on. (Chapter 3 provides details on how to make successful presentations, with tips and guidelines.)
Our members are an eclectic group, their business and investing expertise stemming from an assortment of industries and experiences. There's very little homogeneity. Art Marks, a member who's also a general partner of New Enterprises Associates (NEA), is seated next to Brandy Thomas, co-founder of a young company, Cyveillance. NEA is one of the leading venture funds, with interests in California's info-hub as well as northern Virginia's. Marks came out of General Electric Information Services, where he was president of the Software Products Operation, and hooked up with NEA in 1984. NEA has had a number of home runs, including UUNet. Like many seasoned businesspeople who earned their spurs in the early days of tech investing, Marks joined the Dinner Club to stay in the loop. "I like to keep my ear to the ground and stay in touch with companies at the earliest stages," he says.
Marks liked the young Thomas and referred his deal to the club. He ultimately decided to persuade NEA to lead the second-round financing for it. The company raised $6 million in its first round, with the Dinner Club putting in about $200,000. Thomas is here tonight to update the club on his company's progress, as well as ask for another round of financing, and Marks is here to give support to the chief executive, who has become his friend.
A table over are two active members, Rhea Schwartz and Rick Leavy. Although Schwartz is a decided minority at this dinner, there's no awkwardness. While the Dinner Club has few female investors, it would like more and goes out of its way to welcome prospective distaff angels. However, competition, so to speak, has recently cropped up with the creation of WomenAngels.net, an investment club based in downtown D.C., whose membership is all female. This is a great first for our region--women angel investors coinvesting with VCs and other clubs on hot deals. Schwartz's background is in law and real estate. Formerly an attorney with the banking industry, she cut her business teeth in real-estate development.
Rick Leavy is a cashed-out real estate and high-tech entrepreneur who seems to relish the networking and interaction of club meetings. He exudes enthusiasm for bright ideas and eager entrepreneurs, and is often one of the first members to volunteer to help a funded CEO make a contact or develop a marketing strategy. While Schwartz keeps her ears open for articulate, thoughtful presenters, Leavy likes to hear entrepreneurs who are persuasive at selling their concept. "If someone can't sell, I have a real problem with that," he declares. Like Schwartz and many of the other club members, Leavy is turned off by presenters who seem too full of themselves or a little too hyped. (Again, chapter 3 offers guidance to entrepreneurs on how to present themselves in the best possible light.)
For the next thirty minutes, the group eats and chats, and dinner-table conversation is as likely to cover the Washington Redskins football team as it is the latest business bestseller on the New York Times bestseller book list. Only when people are well into their meals, so they can turn their attention to the podium as much as to whether they want chicken cacciatore or pasta primavera, do we start the meeting. We begin by asking any member who has brought guests to introduce them to the group.
Club member Steve Comiskey has brought his son, David, from Boston, and introduces him as the co-founder of his own start-up, a company called EInk. The proud dad declares, "This company is a rocket. My claim to fame is being the father of this fine young gentleman who is taking the business world by storm." While everyone in the group knows that Steve is motivated by family pride, we realize that angel investing is about networks and contacts. Who knows--in a couple years' time, young Comiskey and the Dinner Club may be investment partners.
A club member introduces the founder of European Business Angel Network, or EBAN, which is based in Switzerland. Angel investing is slowly catching on in Europe, though it's been going great guns for a while in England, and he is in the States visiting various angel groups and gathering information. We hope he'll give us an update on angel activity on the Continent.
Another outsider introduces himself. He is a producer from the A&E Network and is gathering background for an upcoming film on the routes start-up companies take to funding their enterprises. A couple of members have also brought friends, whom they introduce. Although we're given only these people's names and sometimes an affiliation, like a company name, we suspect they're looking us over, perhaps thinking about joining, or know of young companies that could use our financial backing. Again, it's all about networks and the unstated philosophy that we're all here to meet, greet, and learn about investment opportunities, regardless of where they come from. (Chapter 3 describes networking and getting referrals and recommendations that will lead you to angels who may invest in your business.)
Reviewing the Growth of Companies In Which We've Invested
While waiters remove the appetizers and set down platters of meat and pasta, we review the evening's agenda, telling members whom they are going to hear from tonight, the due-diligence reports we'll be getting, and the deals we'll be voting on. We then introduce Brandy Thomas to give us an update on our earlier investment in his company and discuss the progress made in the past few months.
"Cyveillance is growing rapidly as the marketplace embraces our services," he begins. The lights are dimmed, and he clicks on the projector, which displays several milestones on the screen.
"We've gone from twenty employees, when you made your investment, to now over fifty people. We've added marquee clients to our customer list--namely, Disney, Coca-Cola, and Sony. We've gone from having one product, essentially a search service to determine any brand abuses online, to a suite of products that can be licensed by our customers," he continues.
As Thomas clicks through his PowerPoint slides, a murmur ripples through the group. People like what they're hearing and seeing. Six months ago, Thomas stood in front of this same audience, almost begging for its endorsement. A young African-American fresh out of business school, he hooked our group with his predictions of abuses of trademarks on the Web and his proposed solution for protecting those assets. At the time, Cyveillance was a ragtag team of programmers and marketers housed in a rundown townhouse. Now it was starting to look like a real company that has clients, products, experienced executives, and a head start into a lucrative Internet niche.
The slides pause for a few seconds, then disappear. "I'm pleased to tell you tonight that not one but two major venture-capital firms have presented us with term sheets to lead our next round of financing--and at a serious increase in valuation from where you participated less than a year ago." People put their forks down at this point. "When you invested, our company had a pre-closing valuation of $13.5 million. In the next round," Thomas declares, "we expect to raise about $20 million, at a pre-money valuation of $75 million."
Table of Contents
| Introduction | 1 | |
| Chapter 1 | Inside "The Dinner Club": How Angels Evaluate Entrepreneurs | 7 |
| Chapter 2 | When to Dance with an Angel | 27 |
| Chapter 3 | Finding Angels and Making Your Pitch | 57 |
| Chapter 4 | A Match Made in Heaven: Finding the Right Partner | 85 |
| Chapter 5 | Passing Inspection: The Due-Diligence Process | 107 |
| Chapter 6 | Let's Make a Deal: Negotiating Investment Terms | 123 |
| Chapter 7 | Guardian Angels: Good Investors Bring More Than Money to a Business | 147 |
| Chapter 8 | Bye, Bye Angel: Establishing Exit Strategies for Your Investors | 177 |
| Epilogue | 205 | |
| Appendix A | Recommended Reading | 207 |
| Appendix B | Venture Fairs | 211 |
| Appendix C | Representative Structured Angel Investment Clubs and Networks | 213 |
| Appendix D | Sample Term Sheet | 225 |
| Appendix E | AOL Investment Pitch | 237 |
| Acknowledgments | 239 | |
| Index | 241 |
Introduction
Introduction
The days when a Horatio Alger hero could go from rags to riches with nothing but sweat equity, luck, and a good mind for business are gone, probably for good. To survive and thrive, today's start-ups need more than hard work and a good idea. They need capital, and lots of it. And for entrepreneurs who have already exhausted the usual early sources of money (family, close friends, personal credit cards), the next resource is outside investors. Yet many entrepreneurs are rejecting the high demands and costly involvement of venture capitalists in favor of a new form of funding: angel investing.Recent studies show that angels-individual early-stage investorsare the fastest-growing sector of investors. In 1999 they have poured $30 billion into new businesses, compared with $12 billion from venture capitalists. Business-school experts who track investment activity say that business angels currently fund about 60 percent of new technology companies seeking 1 million or less in start-up capital. So you see, most every business does need an angel!
Angels are not professional investment bankers or venture capitalists. Many are ordinary citizens who have achieved a level of success in their own profession, which allows them discretionary savings for creative investing. These citizens are the unsung heroes of American business today-the "millionaires next door" who are looking to go the next step. They are the leading source of fuel for the economy's most vibrant sector-the small businesses of the technological revolution.
Every Business Needs an Angel is the first essential guide to what promises to be the most popular form of investing in the next decade. The book is intended for any entrepreneur looking for an investor, and any investor looking for a new enterprise. It is written by two people who have been involved in angel investing from the start, and who are at the epicenter of one of the country's fastest-growing angel markets. The Washington, D.C., area is now home to far more entrepreneurs and businesspeople than federal workers, and it has more start-up activity than even Silicon Valley, according to several recent reports. The quiet shift from government-based economy to an entrepreneurial one is being repeated everywhere, from Boston to Austin to Baton Rouge. The D.C. region is just further along than most.
The book offers a blend of compelling stories, sound advice, personal anecdotes, and pearls of wisdom collected over many years of investing experience. On one side of our story are the 300,000 active angels and the 3.4 million estimated millionaires in this country who want to know how to invest creatively; on the other side are the tens of millions of businesspeople and would-be entrepreneurs who are looking for an insider's edge to get funding.
We have spent the past fifteen years advising, managing, and investing in early-stage companies. Cal Simmons became an angel after being a successful owner/operator of a business; John May's insights and expertise comes from organizing and running small venture-capital funds. Together, we've been involved in more than 50 private equity transactions. Based on our experiences with both entrepreneurs and investors, and recognizing the need for a practical guide to finding angel capital, we decided to write this book.
We helped create the model for structured angel group investing. By early 2001, we had organized or advised four angel clubs in the Washington, D.C., region, managing over $50 million in investable assets, touching 275 investors monthly, and making dozens of investments in early-stage companies annually.
One of the angel clubs we founded is called the Dinner Club. This fund is an example of a new generation of angel investing: It is a structured organization of sixty individuals who have each contributed $80,000, creating a $5 million pool to back at least a dozen companies. The group meets monthly to hear pitches from entrepreneurs, does follow-up investigations, and makes early-stage investments by majority vote. This group of angel investors served as a sounding board for many of the ideas related in our book. Several of the examples are from actual investments that the Dinner Club has pursued, and many of the entrepreneurs quoted received their first exposure to angel investors through this group. Week after week, month after month, we meet with entrepreneurs out searching for funding. Sometimes they are successful; often they are not. Frequently the deals we see are good ones, but they are being presented unclearly or lack a simple key ingredient. We're constantly amazed at how naive or ill-prepared many founders of new companies are when it comes to fund-raising. Having spent many years advising investors, we have developed a sixth sense for what they are looking for in an "investable deal," what it takes to convince them to write a check. In this book, we are going to share these secrets with our readers.
We will tell you where to find investors, how to prepare your presentation to them, how to evaluate whether they are the right partners for you . . . and then, perhaps most importantly, how to negotiate and structure a deal that is beneficial to both entrepreneur and investor. We'll even take a stab at explaining how to evaluate opportunities and prepare for a successful exit for both parties.
We will do all these things by sharing with our readers real-life examples of actual early-stage companies and their founders' efforts to raise outside capital. We're going to introduce you to entrepreneurs who have gone from launching raw start-ups to leading public companies-and tell you how they did it. We'll also show you some who had great ideas but failed to realize their potential. We'll examine why it is that some good companies never get funded and others, based on the strength of just an idea, are able to raise millions of dollars.
Underlying our many examples will be lessons for anyone interested in pursuing this New Economy dream . . . the founding of your own business. We will explain the subtle and not-so-subtle differences between success and failure, and we'll lay out the steps to help attract money to fledgling enterprises. The end of every chapter includes "angel advice" that summarizes key points.
Our book is organized in a way that allows readers to either jump around to chapters of primary interest or to read straight through from beginning to end. If you're looking for a good place to start, the following chapter descriptions should help. Feel free to dip into the book anywhere. We hope reading any one section will make you want to know more about the whole journey. Bon voyage.
In Chapter 1, we relive an entire evening meeting of one of our dinner clubs, meeting nervous presenting entrepreneurs and angel-club members of all types. We show what goes through the mind of investors, discuss techniques used by company founders in attracting attention, and provide a window on the decision-making process of multiple angels when they pick the lucky winner of the initial dance. If you only read one chapter, we suspect you'll enjoy and be stimulated by the "dance" seen in this evening's events. Chapter 2 is all about relationships. Angel investing varies greatly from bank financing and later-stage venture funding in that it is people to people. You get to meet, know, and bond with the check writer, not just deal with supporters by e-mail and snail mail. Since angel investing is an intensely personal experience, delivering both psychic reward as well as possible wealth, you have to know how to understand human chemistry and how to build lasting partnerships. Go to this chapter now if you are intrigued about what "warm money" means. Be sure not to skip these insights when building your understanding of the entire angel-matching phenomenon.
By Chapter 3, you get ready to build the business plan and to execute the strategy to have it financed by angels-and we also offer stories of entrepreneurs who weren't quite ready for angel investing. Why read the whole book or go through the heart-wrenching process of business formation if you find in these early chapters that your business concept or your personality won't appeal to individual investors? "Angel Advice" here will clearly deal with whether the angel investor world is for you.
For those on the path in search of company funding, we launch Chapter 4's guidance clearly at finding the right partner. Did you know that there was such a thing as bad money? Angels from hell? No matter how great your idea or high your hopes, you could be dashed if you find the wrong partner. We know you want specific, detailed how-tos by this stage of the learning curve on how every business needs an angel.
Chapter 5 is all about who angels are in today's market, how they are developing sophisticated structured groups in every community in the nation, and how to present to them. The presentation process is as important as your company's product or service, so learn how to prepare your elevator speech, and what are the key dos and don'ts on presentations. If you have only eight minutes to convince an angel, could you do it?
Let's make a deal! Chapter 6 offers checklists of information you'll have to provide to angel prospects to get their confidence and see examples of term sheets (which are offers of funding). But remember, you are dealing with angels of all types, and one may well work out just in time for you. What types of business plans work with which types of angels? How will you value your company? Also, without some guidance with professionals-like lawyers and CPAs-you'll possibly have a sadder but wiser story to tell, so learn here how to deal with the financial closing process. And what a feeling when you see that check from the investors at the closing at your attorney's offices!
1 Once an angel relationship is begun, there is so much more than money to talk about. Chapter 7 offers tips on how to live with your financing partner in a mutually beneficial way. If this is your key area of concern, jump to it first, then come back for the stories and insights about the entire life cycle of entrepreneurs and angels in the rest of our chapters. There are suggestions for getting better advice from your angels and outside advisers and what to do if the relationship hits a rocky patch. Having individual investor partners is like a marriage, so be prepared.
Finally, we provide stories about how the end of the angel experience can benefit entrepreneurs as well as funders. Chapter 8 is all about the five typical exits that angels develop. Find out why acquisitions are the most likely way entrepreneurs and angels cash out-and what to watch out for in the deal. Angels and venture investors do need an exit, a way to get their money and-everyone hopes-profits back out. The whole reason we present this book to you is to understand the entire life cycle of an encounter with an angel-not only determining if angels are for you but also learning how to eventually separate and have a mutually beneficial exit.
We enjoy the entire business formation and growth process, the human drama, the stimulation of creativity and tension, and the high that comes when wild successes occur. Group dynamics of bands of angels heighten our experience and have led to many of the stories and learnings we share in this book. Each dance between entrepreneur and investor is uniquewe look forward to hearing from many of you about your experiences. May each of you aspiring company founders grow to become angels in your own right and continue the evolution that we have experienced!