It Took 50 No's to Find the First Angel
Harry Upton had a million-dollar product idea. All he needed was money. After 30 years in the health products business, he knew bankers and venture capitalists wouldn't touch his startup business plan. So Upton began thumbing through his Rolodex, calling executives from his former companies, people he'd met at industry conventions, ad contacts that his two cofounders knew. His six-month recruitment drive pulled in $400,000 to fund R&D and marketing for his lice-egg remover product. Today, two rounds later, he's raised more than $1 million from 24 angel investors.
Angels are wealthy private investors who fund mostly startup companies in return for an equity stake. William Wetzel, founder of the University of New Hampshire's Center for Venture Research, calls this form of financing "the entrepreneurial farm system." Just as baseball players are groomed on farm teams, entrepreneurs use angel financing to become major league players. After family and friends, "angeles are often the best chance for capital that early-stage companies have," he says.
For growing companies, the terms are good, too. Investors are willing to wait seven years or longer to cash out. And, says Wetzel, a recent change in capital gains tax laws gives angels more incentive to invest. Last year, the government reduced the capital gains for individuals holding investments in small businesses for five years or longer.
Hunting for Angels
To get a piece of the $15 billion that angels pour into companies' coffers every year:
Work every connection you have. Upton's hunt began with calls to his contract at Procter & Gamble, Mead Johnson, and Abbott Laboratories. Consider entrepreneurs in your industry who have already made their millions. Paul Allen, cofounder of Microsoft, has bankrolled several computer-related companies, including America Online.
Check your local newspaper for stories on executives involved with philanthropic ventures: trustees of hospitals, board members at a community college, or wealthy individuals involved with nonprofits. If your business addresses a cause any of them are passionate about, you may have a match.
Inquire about events where you can present ideas to investors. The New York Venture Group holds a monthly breakfast meeting that includes a segment during which entrepreneurs can voice their...