After participating in the NewMe Accelerator, Nait Jones (r) got angels to invest $1.5 million in his business
Quitting a stable job in a tight economy and selling all your belongings to start a business while you have a wife and young children to support is a risk most wouldn’t take. But it was one that was worth it for Naithan Jones. He is the founder and CEO of AgLocal (www.aglocal.com), a company that aims to revolutionize the meat industry by playing matchmaker between consumers and small producers of responsibly raised meat, wholesalers, and retailers. His idea for an agricultural tech firm managed to raise $1.5 million in financing from angel investors and venture capitalists, with the 2011 startup valued at $6 million.
The 38-year-old innovator made the leap from a manager at the Kauffman Foundation to an entrepreneur, and as with the majority of companies, initial seed money came from family and friends. And like Jones, many early-stage business owners are seeking angel investors to fill in the gap in startup capital.
An angel investor is a private individual with a high net worth who helps capitalize an entrepreneurial endeavor. Historically, angels have been a primary source of seed and startup capital for entrepreneurs, investing in companies in exchange for equity ownership. Funding by angel investors reached $22.9 billion in 2012, reports the Center for Venture Research at the University of New Hampshire. Angel investors funded 67,030 ventures during that period at an average deal size of $341,800.
Although angel investors are located all around the world, they aren’t necessarily easy to locate. Most entrepreneurs find angels through word of mouth but some are finding more effective ways of meeting private investors. This includes participating in venture accelerator programs, joining angel networks or forums, and entering elevator pitch competitions.
Jones’ initial fundraising efforts through family and friends netted $48,000. He used that money to cover living expenses and to pay his first employee. In securing his second round of funding, what prepared him to present investors with a solid pitch was his spring 2012 participation in NewMe, the three-month startup accelerator/incubator specifically designed for minorities in technology. The Silicon Valley-based program helped Jones fine-tune his business plan. Taking part in NewMe connected Jones with investor and tech magnate Ben Horowitz of Andreessen Horowitz , among others who invested $1.5 million in AgLocal.
Pitching to potential investors was daunting and arduous for Jones.
“I had a community of advisers hammering me every single day,” he says. He closed his second round of fundraising in about six weeks. “I must have pitched over 200 times, and I was in about 65 rooms in front of angels and venture capitalists.”
Early-stage business owners looking for intense entrepreneurial training that could lead to exponential growth should consider participating in a venture incubator/accelerator. These programs usually require a full-time commitment at a facility for several months in exchange for aggressive business plan coaching, entrepreneurial mentoring, networking, and eventually an equity stake in the company, usually somewhere between 4% and 8%. At the end of the program, many incubators and accelerators have a “demo day” when companies pitch to a roomful of angel investors and venture capitalists.
“One benefit of being part of an accelerator is connecting with a community of entrepreneurs who are in the same stage you are,” says William Crowder of Dream It Ventures, a Philadelphia-based startup accelerator. “Through the networks you’ll build at an accelerator, you’ll connect with partners in the venture community and tap into potential customers you’d never have access to otherwise. Accelerators put your business on steroids, legally.”
But acceptance into an incubator or accelerator isn’t a breeze. Many accept no more than 10 to 15 businesses for each class. Crowder says DreamIt is laser-focused on the aptitude of the applicant’s management team. The quality of applicants’ tech expertise weighs heavily in the selection process as well as how innovative the business idea is and how much of an impact it will have on the lives of others.
Valerie Gaydos, founder and president of Capital Growth Inc. and founder of the Angel Venture Forum, highlights angel networks and forums as another route. These networks are a collection of angels who pool their resources and expertise to capitalize high-growth businesses. When attending an angel forum event, Gaydos says, think of it like dating: “Angel forums are a great place to meet people, but the right match isn’t always the person you meet the first time.” She says even if you’ve met the wrong match initially, the key is to ask that investor the questions that will lead you to the right match.
“Many people make the assumption that angel investors are philanthropists. We can be philanthropists, but our main goal is making money,” says Gaydos. “We’re investors, and people need to understand that we need to get a return on our investment.” And it all comes down to the numbers. “We want to know how we’re going to get our money back in multiples of our initial investment.” Not understanding return on investment is one of the biggest mistakes Gaydos says entrepreneurs make, and it’s a mistake that could cost them a major funding opportunity.
Timothy Reese, founder of the National Minority Angel Network, says that when listening to a pitch, investors want to understand what problem the business is solving, what the business has come up with as the solution to the problem, who’s the market, and what results the company has produced so far. Investors will also want to know how the business plans to use the angel funds to grow.
To actively seek out angel investors, you can cast a wider net through sites such as Angel.co, a community of startups and investors, and Gust.com, a global service that matches early-stage startups with investors. Also, regularly attend meetings, conferences, and social events.
Angel Forums and Networks
Angel Capital Association – Trade group for angel investors. Also provides resources for entrepreneurs seeking financing.
Angel Venture Forum – Group of angel investors who seek to invest in high-growth, scalable, early-stage ventures. Holds events for investors and entrepreneurs to meet.
Minority Angel Investor Network – Angel network focused on developing minority-owned companies, targeting lack of capital access among minority-owned businesses.
Angel Venture Fair – Places investors and entrepreneurs together at a one-day event where companies can make their case to angels. Revenues must not exceed $10 million.
The Gathering of Angels – Monthly meet up of angels seeking to fund early-stage ventures. Entrepreneurs are welcome at each monthly event.