Attracting Capital From Angels: How Their Moneya€”and Their Experiencea€”Can Help You Build a Successful Company

338 Pages·2002·0.93 MB·English

by  Brian E. Hill

CCC-HillFM(i-xii)11/21/011:15PMPagei
A
TTRACTING
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APITAL
FROM
A
NGELS
H T M — T
OW HEIR ONEY AND HEIR
E —C H Y
XPERIENCE AN ELP OU
B S C
UILD A UCCESSFUL OMPANY
B R I A N E . H I L L
a n d
D E E P O W E R
JOHN WILEY & SONS, INC.
CCC-Hill1(1-82) 11/20/01 1:23PM Page2
CCC-HillFM(i-xii)11/21/011:15PMPagei
A
TTRACTING
C
APITAL
FROM
A
NGELS
H T M — T
OW HEIR ONEY AND HEIR
E —C H Y
XPERIENCE AN ELP OU
B S C
UILD A UCCESSFUL OMPANY
B R I A N E . H I L L
a n d
D E E P O W E R
JOHN WILEY & SONS, INC.
fcopyebk.qxd 2/28/02 5:58PM Pageii
Copyright © 2002 by Brian E. Hill and Dee Power, New York. All rights reserved.
Published by John Wiley & Sons, Inc., New York.
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Preface
Hundreds of angel investors, entrepreneurs, and experts contributed
to Attracting Capital from Angels through short question-and-an-
swer sessions, surveys, and in-depth interviews. The angels are from
all parts of the United States. Some have been investing for many years;
others have limited investing experience; a few have founded angel net-
works. The angels interviewed or surveyed were for the most part accred-
ited and have invested in more than one company. Some of the names
you will recognize as they have achieved a certain visibility within the
venture capital and private equity community.
Fifty accredited investors completed our survey and gave us a picture of
the average angel investor, but please remember: If you are an entrepre-
neur looking for investors, don’t rely on generalizations. Angels vary
widely in personalities, investment preferences, and desired involvement.
All the angels we talked to, whether they preferred to remain anony-
mous or allowed themselves to be identified, provided valuable input
and advice.
Seventeen professionals in the fields of law, accounting, marketing,
public relations, and other disciplines contributed their expertise and
added immeasurably to the value of the book. You can find out more
about them in the Appendix.
Acknowledgments
The first people to thank are our fathers, Owen L. Hill and Harry D.
Power, who viewed writing as something exciting to do.
iii
iv Preface
In one sense, this book was begun when we sat down to put the
words on paper in mid-2001. In another, it is the product of a 15-year
journey of working with, observing, and listening to entrepreneurs and
angel investors as they went about pursuing the entrepreneurial
dream. Along the way we visited the high towers of the finance dis-
trict as well as quiet labs on the wrong side of town where one person
tinkered on a technology alone. We met heroes, swashbuckling risk
takers, geniuses, thieves, philosophers, and a few people who just
seemed pretty much insane.
We included many of their stories in the following pages, and just as
importantly tried to incorporate a sense of the zeal with which they
chased after this elusive dream. At times the process of growing a ven-
ture seemed grand, other times it seemed down and dirty.
All the players in this arena—investors, entrepreneurs, and experts
in the law and finance—were extraordinarily willing to take the time
to talk with us about the fascinating subject of how individuals
finance early-stage companies. A few people even sat down and
answered our questions with thoughtful essays, hoping that others
would be able to learn from their experiences, ideas, and accumulated
wisdom.
So, apart from the first two people we mentioned, we don’t have a spe-
cific one or two or five people to thank for helping us complete this pro-
ject. They number in the hundreds; they are out there right now,
working late, getting closer to building something big. It is past mid-
night, and their lights remain on.
Creating a great enterprise starts with possessing a rare gift—the vi-
sion to see the future. We would never claim to have that gift ourselves,
but we can confidently make this assertion: Entrepreneurship is alive and
well, and it is most definitely a dream worth going after with all of your
energy, now and always.
Contents
Foreword by Bob Bozeman ix
Foreword by Randy Haykin x
WHAT IS AN ANGEL AND WHAT DO ANGELS WANT?
CHAPTER The Fascinating World of Angel Investors 3
1 Who are angels? Do they have cell phones in the clouds?
Risk capital and ultrarisk capital.
CHAPTER Trends in Angel Investing 13
2 The climate today. When will angel investing again take flight?
The environment of angel investing is constantly changing.
CHAPTER What Is an Angel Investor? 24
3 Demographics. Other angel characteristics. The amount
of angel capital available has barely been tapped. Is there
an angel out there for everyone?
CHAPTER Why Do People Want to Be Angels? 33
4 Dinner and a show. To pass along hard-won knowledge.
Get ’em while they’re hot. Some of our best friends
are greedy. The need to stay in the game.
CHAPTER The Challenges of Being an Angel 41
5 The angel’s challenges are myriad. Finding good deals.
Analyzing the opportunity. Learning how to be an angel.
Finding angels to co-invest with you. Minimizing woes
after the close. Portfolio strategy.
CHAPTER Angels Compared to Venture Capitalists 49
6 Many times, they both get involved. You know they’re
out there, but where? One has to invest, one wants
to invest. Anything one can do, the other does better.
Differing amounts of investment. Differing approaches to
management.
v
vi Contents
CHAPTER What Do Angels Want? 61
7 Investment preferences. What excites angel investors about a
deal? Why do angels say no? Strategies for dealing with
rejection. Perfection is unattainable, but worth striving for.
CHAPTER Entrepreneur Characteristics That Attract Angels 75
8 Profile of a successful entrepreneur. Angel survey results.
TYPES OF ANGELS
CHAPTER The Many, Many Types of Angels 85
9 Three basic types. Another way of looking. Women angels,
and we don’t mean the Victoria’s Secret kind. Venture
capitalists who moonlight as angels. Will-work-for-equity
angels. Angels who build a technology, not a company.
Corporations as angels.
CHAPTER When Angels and Venture Capitalists Are on 100
10 the Same Team
Sport of champions. A VC fund that welcomes little guys.
Stock exchange for private placements.
CHAPTER Devil in a Blue Suit: Spotting Frauds and Cheats 105
11 Dumb angels. Fallen angels. Angel knows best.
The sweat equity specialist. Brokers posing as investors.
Concierge of Heartbreak Hotel. Presenting the one and
only vulture capitalist.
PREPARING FOR A GLIMPSE OF HEAVEN
CHAPTER Why an Attorney Is an Absolute Must 115
12 A brief tour of securities laws. Keeping a tight grip on your
intellectual property. Nondisclosure or confidentiality
agreements.
CHAPTER Putting Together Your Advisory Board 123
13 Opening doors to important strategic relationships.
Designing an advisory board. Too many cooks?
A new kind of status symbol.
CHAPTER The Poor, Misunderstood Business Plan 133
14 Entrepreneurs say the cutest things. What should be
included in your business plan? Who should write the plan?
How do you know your plan is ready?
CHAPTER The All-Important Marketing Plan 142
15 Why it must be carefully thought out. Structure.
Contents vii
CHAPTER Do Angels Put Any Credence in Business Plans? 148
16 What do angels think? An expression of success. Should you
tailor a business plan specifically for angels? Critical mistakes
you don’t want to make.
CHAPTER Polishing Your Pitch 161
17 The really great presentation. Passion combined with
rigorous analysis. Critical mistakes in your presentation.
FINDING AN ANGEL
CHAPTER How Do Angels Find the Deals? 171
18 Referrals and groups. On-line matching services.
Investment banking networks. How do entrepreneurs
think angels find the deals?
CHAPTER Why Do Angels Band Together? 178
19 Types of angel networks. Different meeting structures.
CHAPTER Behind Closed Doors 189
20 How are entrepreneurs selected to present? The mentoring
process. What happens when you meet with an angel?
CHAPTER Tracking the Flight Path of Angels Is Difficult:
21 They Don’t Show Up on Radar 200
First step: construct a perfect angel. Will an intermediary
really help you find angel capital? Angels and incubators.
What do entrepreneurs advise?
CHAPTER Making It Easy for an Angel to Find You 211
22 Using the media. Building a network. Conferences,
forums, and trade shows.
YOU’VE FOUND AN ANGEL — NOW WHAT?
CHAPTER To Invest or Not to Invest: That Is the Question 221
23 Angel decision making. Critical factors in the investment
decision. Due diligence.
CHAPTER The Mystery of Valuation 236
24 A simple pricing formula for an early-stage venture.
ROI expectations.
CHAPTER Coming to Terms 247
25 Term sheets. Structure of the deal.
How long until closing?
viii Contents
CHAPTER Entrepreneurs Who Attracted Angels to Their 255
26 Company
A discussion with the founders of Reason, Inc.
LIVING WITH AN ANGEL
CHAPTER Advantages of an Angel Investing in a Company 263
27 Expertise and contacts.
CHAPTER Working with an Angel after the Close 273
28 Reporting to the angels. Exit tragedies. Protection of
legal agreements. To meddle or not to meddle.
Patience is an important angel virtue.
CHAPTER Tales from the Venture Vault 284
29 Horror stories and advice from entrepreneurs and angels
about why things go awry.
THE FUTURE OF ANGEL INVESTING
CHAPTER Making the Angel Investment Market More 293
30 Efficient
The financing of early-stage companies. The problem is all
in the geography. How do people in Phoenix view Silicon
Valley? Broadening angels’ investment interests.
CHAPTER Outlook: What a Wonderful World It Could Be 304
31 The story of a start-up as told in the year 2010. How
things have changed. What can we really expect in
the future?
APPENDIX Experts Who Contributed to Attracting Capital 314
from Angels
Index 321