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Where Bankers Fear To Tread
Cyber-angels offer heavenly cents to small-business dreamers
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Business New Haven
9/20/1999
By: Lori Green
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Looking to finance a start-up or early-stage company? Chances are slim that you'll make the bankers' A list first time out.
Businesses trying to raise between $1 million and $5 million tend to have the hardest time securing the funds they need. Beyond the $5 million mark, you could qualify with traditional investment banks or commercial lenders. Below $1 million, there are SBA and other small or microloan programs.
That leaves many start-ups turning to the VCs: the venture capital community, a/k/a "vulture" capitalists. These are usually smart people with deep pockets who will gladly back your business for up to 80 percent equity plus their guy running the show.
But so-called angels are different, and there are more of them today than ever before.
Angel investors mainly want a decent return and participation at the ground-floor of a promising business. Angels are wealthy private individuals who are looking for high-growth potential. They typically have a net worth greater than $1 million, or individual annual income of at least $200,000. Angels may not rush in where bankers fear to tread, but they are eagerly waiting at the gate for the right company.
ACE-Net, the Angel Capital Electronic Network, has a Connecticut presence on the Web (www.ace-net.sr.unh.edu/). It is a fee-based service sponsored by the U.S. Small Business Administration (SBA) to provide entrepreneurs with $250,000 to $5 million in equity financing.
Presently active in 40 states, the network is directed in Connecticut by Dan Mitchell, director of the MBA program at Southern Connecticut State University. The service has been on-line since late 1998 and currently lists 42 Connecticut-based companies seeking funds. It also lists 50 of the state's angel investors. The maximum annual fee for unlimited access to all ACE-Net services is $450.
"The average investor wants to invest $10,000 and up, and many are interested in putting their money into more than one company in order to diversify risk," explains Mitchell. Only private investors accredited by the U.S. Securities & Exchange Commission (SEC) can enroll with ACE-Net.
Since in Connecticut there are no VCs listed on the network, it's more likely that if you link up with a listed angel to help bankroll your business, he or she will pitch in to help you succeed, rather than crowd the plate and eventually pitch you out.
The SBA reports that nearly 30,000 high-growth companies are funded annually by angels, who collectively spend between $20 billion and $30 billion of their own money each year. Some of the Connecticut-based investors were owners of family businesses where there was no successor. After selling out, these entrepreneur-investors are now looking for a new opportunity to grow a business.
Angels often have marketing, technical or financial expertise that they want to use to launch a start-up or to position a fledgling company for second-round financing. Says Mitchell: "The investors listed with ACE-Net are principally professionals such as doctors, lawyers or entrepreneurs who need to re-invest money they've made from other companies, and particularly in recent IPOs. Most want to be within a day's drive of the company they take a stake in."
And speaking of recent IPOs, what segment of the market draws the most angel interest? "Internet interest is still very high and glamorous," notes Mitchell. "It's unfortunate in a way since there many excellent opportunities in other sectors, such as manufacturing."
Still, of the three deals that closed as a result of investors and entrepreneurs finding each other through ACE-Net, one involved a company with a proprietary manufacturing process, and the other two were high technology-related. Values of these transactions ranged from $750,000 to $2.5 million.
Since ACE-Net is purely a listing and not a matching service, the network doesn't get involved in structuring deals. Once a company and investor show interest in each other, it's up to them to retain the necessary attorneys and investment bankers to conduct the due diligence, negotiations, etc.
Mitchell will hear about a successful transaction once it is completed, when one or both parties call to request that they be removed from the site's database.
Mitchell's plans for upgrades to ACE-Net include more specific profiling of market segments to better inform prospective investors. The service will also provide entrepreneurs with more opportunities for networking, obtaining information, and learning about the basic guidelines of angel financing.
"One area in which entrepreneurs need more help is in understanding how to present a business plan to private investors," Mitchell explains. Inclusion of an exit strategy is critical in the private equity market: investors want to know how they will get their money back if the company fails.
In addition to ACE-Net, there are a couple of other angel gathering places on the Web. The Private Capital Clearinghouse (www.pricap.com) is a membership network of investors interested in dynamic young companies.
Business and credit information giant Dun & Bradstreet hosts a site (www.businesspartners.net) for investors seeking participation in start-ups, private placements, corporate finance, real estate and IPOs; entrepreneurs are invited to list their offerings.
And because many angels prefer to have a deal brought to them by someone whose judgment they trust, investment bankers who specialize in your industry are typically an excellent source for finding the angel of your dreams.
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