Angel Financing How to Find and Invest in

Your guardian angel has arrived Capital is the single most important factor to getting your venture off the ground, but finding it can be a challenge, particularly if you're running out of funding options. Suppose your venture is too small for institutional players. What do you do once you've exhausted your personal financial resources? Where do you go after banks, the leasing companies, the venture capital firms, have turned you down? What you need is an "angel"--a private investor with high net worth. Angel Financing--the only book of its kind--provides you with a road map to this valuable, little known, source of capital financing

Gerald A. Benjamin (Sausalito, CA) is a Senior Managing Partner of International Capital Resources (ICR), an investment banking, corporate finance, and capital sourcing firm. He is also publisher of the California Investment Review.

Joel Margulis (Mill Valley, CA) is a freelance writer who has published books and articles on a range of business and finance topics.

Preface

ix

Acknowledgments

xix

Introduction

xxi

PART 1 THE CHALLENGE AND THE SOLUTION

1

(56)

The Challenge

3

(10)

Introduction

3

(1)

The Challenge

3

(2)

The Direct, Private Investor

5

(2)

Structure of the Private Investor Market

7

(3)

Investor Activity in Early-Stage Deals

10

(1)

Angels, a Golden Capital Source

10

(1)

Investors Worth Accessing

11

(2)

The Private Placement Investment

13

(18)

The Private Placement Investment

13

(2)

Selecting the Right Capital Source

15

(1)

Is Your Deal Financeable?

15

(6)

Are You Financeable?

21

(3)

Is Your Risk Financeable?

24

(1)

The Benefits and Disadvantages of Equity

25

(3)

Making Your Search for Investors More Efficient

28

(1)

The Problems with Conventional Wisdom

29

(2)

A Strategy That Works

31

(26)

An ``Inefficient'' Market Defined

31

(1)

A Strategy That Works

32

(23)

Dreamers and Dream-Makers

55

(2)

PART 2 THE ANGEL INVESTOR

57

(82)

Alternative Sources of Capital

59

(22)

The Impact of Political and Economic Trends on the Accessibility of Capital

61

(8)

Alternative Sources of Capital and How They Affect Early-Stage Investment

69

(1)

Business Angels as the Best Sources of Capital, Especially for Early-Stage Investment

69

(1)

The Appropriateness of Your Venture for a Direct, Private Investment

69

(6)

Professional Venture Capital as a Funding Resource for Early-Stage Companies

75

(2)

Comparison of Angel Investors with Professional Venture Capitalists

77

(2)

Professional Venture Capital: Help or Hindrance to Your Funding Success?

79

(2)

What Do Private Investors Look for in a Deal?

81

(20)

The High-Net-Worth Investor Market

81

(2)

The Informal, High-Risk, Investor Profile

83

(2)

Advantages of Direct Venture Investing

85

(1)

The Private Investor's Criteria

86

(4)

Common Reasons Why Angels Reject an Investment

90

(1)

Variations in Preferred Level of Involvement after Investment

91

(1)

How Angel Investors Can Help---Beyond Capital

92

(1)

Private Investor Motivation

93

(3)

The Allocation Decision

96

(2)

Principles of Direct Venture Investing

98

(3)

Types of Private Investors

101

(32)

Introduction

101

(2)

The Value-Added Investor

103

(6)

The Deep-Pocket Investor

109

(11)

The Consortium of Individual Investors

120

(3)

The Partner Investor

123

(2)

The Family of Investors

125

(1)

The Barter Investor

126

(3)

The Socially Responsible Private Investor

129

(2)

The Unaccredited Private Investor

131

(2)

The Newest Breed of Angel: The Manager-Investor

133

(6)

The Manager-Investor

133

(6)

PART 3 RESOURCES: FINDING ANGEL INVESTORS

139

(36)

Alternative Funding Resources in Accessing Angel Capital

141

(22)

History of the Development of Alternative Funding Resources

141

(3)

Overview of Alternative Funding Resources

144

(8)

Performance of the Top 20 Formal Investor Networks

152

(1)

Directory of Alternative Funding Sources

153

(10)

Building Your Own Database of Angel Investors

163

(7)

Introduction

163

(1)

Hurdles

164

(3)

Data Entry

167

(1)

Backup

168

(1)

Cost

168

(2)

The Role of the Placement Agent in Raising Capital: A Marketing Partner for Your Deal

170

(5)

Introduction

170

(1)

The Placement Agent: A Marketing Partner

170

(5)

PART 4 THE INVESTOR PERSPECTIVE

175

(71)

The Venture Process

177

(12)

Introduction

177

(1)

Driving Forces Creating Direct Investment Opportunities

177

(1)

History of Early-Stage Investing

178

(1)

Overview of the Omnibus Budget Reconciliation Act of 1993 and Its Implications for Private Investing in High-Risk Deals

179

(1)

Disadvantages of High-Risk Investing

179

(1)

Risk Characteristics

180

(2)

Hedging Strategies---How Angels Manage Risk in Direct Investing

182

(1)

The Syndication Bias

183

(1)

How Investors Generate Deal Flow

184

(1)

Financial and Nonfinancial Return on Investment: Angels' Expectations

185

(1)

Elements in Structuring the Private Placement

186

(1)

Approaches Angels Use to Monitor Investments

187

(1)

Harvesting Returns: Realistic Exit Strategies

188

(1)

The Valuation Process in Private Transactions

189

(13)

Introduction

189

(1)

Sweat Equity

190

(1)

The ``Living Dead''

190

(2)

Risk

192

(2)

Negotiating Valuation

194

(1)

Valuation and Stage of Development

195

(2)

Truisms in the Valuation Process

197

(2)

Caveats---For Entrepreneur and Investor Alike

199

(3)

Due Diligence

202

(17)

Introduction

202

(3)

Due Diligence Questionnaire

205

(14)

On-Line Options: Entrepreneurs, Investors, and Web Sites

219

(10)

On-Line Links

220

(5)

Promises and Pitfalls

225

(4)

Answers to Common Business Angel Investor Questions

229

(17)

Conclusion

244

(2)

Appendix A Legal Primer on Securities Law Issues for Nonlawyers

246

(21)

1. Overview

249

(6)

2. Private Offerings---The First Step

255

(2)

3. Public Offerings

257

(3)

4. Disclosure Documents

260

(1)

5. Integration Rules: Timing

260

(1)

6. Restricted Securities and Trading

261

(2)

7. The Internet

263

(1)

8. Federal/State

264

(1)

9. The '40 Act

265

(1)

10. The Usual

266

(1)

11. Sales---``Agents'' (California)

266

(1)

Appendix B Preparing an Investor-Oriented Business Plan

267

(33)

Introduction to the Business Plan

267

(1)

What Does Your Business Plan Need to Contain?

267

(1)

Creating a Business Plan

268

(32)

I. Executive Summary

268

(1)

II. Mission or Charter

268

(1)

III. Description of the Business

269

(1)

IV. Ownership Structure and Equity

270

(1)

V. Description of Product/Service

271

(1)

VI. The Market

272

(3)

VII. Description of Industry and Trends

275

(1)

VIII. Marketing Strategy

276

(2)

IX. Marketing Plan

278

(2)

X. Sales Plan

280

(2)

XI. Operations, Research and Development Strategies, and Plans

282

(2)

XII. Management, Organization, Personnel, and Information Systems

284

(3)

XIII. Objectives and Milestones

287

(2)

XIV. Financial Projections

289

(3)

XV. Supporting Documents

292

(8)

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Angel Financing How to Find and Invest in Private Equity

Summary

Author Biography

Table of Contents

Supplemental Materials