Do you believe in angels? If you're a small-business owner, chances are you should. Not the kind that fly about the heavens but an earthbound variety that invest capital in small and midsize companies. Blessed with their support, you can raise cash to start or grow a business.
Who are these angels and why are they willing to back your company?
"They are affluent business people and professionals who are willing to risk their capital for the opportunity to earn substantial returns," says Sheldon Phillips, a partner with the accounting firm of Phillips, Gold.
"For short-term investments of from two to three years, they'll look to double their money. And where they have to wait much longer to cash out, say eight to 10 years, they'll want to earn five times their initial investment," Phillips explained.
Angels fill a critical gap in the capital pipeline, providing assistance where banks and other institutions fear to tread. For example, angels will provide seed capital for start-up ventures and growth capital for ongoing businesses that are too shaky from a debt to equity standpoint qualify for traditional sources of financing.
"In a recent deal, a group of private investors backed a project to convert a traditional hotel into luxury condominiums," Phillips says. "As the plan was spelled out, the developer would buy the building, do the conversion and market the condo units.
"Because this was a high-risk proposition, the banks wouldn't touch it. But the private investors came up with the money, lured by the prospect of earning 70 percent on their capital in 18 months.
"Unfortunately, the weak real estate market put a damper on the project. Now the investors are just hoping to break even.
"But most recognize the high risk-reward ratio when they go into these deals."
Unlike institutional lenders, angels play an intimate and demanding role in the companies they finance. Most will want to sit on the board of directors, or in some cases to assume executive positions in the company.
"Where one investor puts up a substantial chunk of money, that person will likely want to influence decision-making from the start," Phillips explains. "But where a group of small investors put up the cash, they may be content to sit on the sidelines as long as the company performs well. In a typical arrangement, the investors remain passive unless the business falls short of its projections by 25 percent or more. Should that happen, they move from the sidelines to the front lines."
In addition to some degree of control, angels will demand a substantial share of equity in the ventures they back. Entrepreneurs working with angels should be prepared to relinquish 50 percent or more of their companies to these FTC investors. Although this is a steep price to pay, it may be the only way to finance a business, especially in the start-up stages.
In the search for an angel of your own, networking is most productive. In some cases, organizations facilitate this. The Texas Capital Network, based in Austin, joins a group of 60 investors with prospective business ventures through a computerized matching service.
It has worked that way for Benito Triglia, the inventor of a child's car seat that converts into a stroller.
When Triglia showed the plans for his innovation to Croton, N.Y., attorney Robert Hilpert, the lawyer assembled a team of investors who are now poised to back the product once the prototype is completed.
"The way it looks now, we may be able to raise as much as $300,000 to get my invention into production by the first quarter of 1991," Triglia says. "That could not have been done without outside capital."
As you look for angels, be aware that some focus their efforts in backing selected industries and others even favor certain types of entrepreneurs.
"Many of these private investments are made on an emotional basis," says Joe Murphy, a partner with the accounting firm of Price Waterhouse. "For example, one woman angel finances only woman-owned ventures. And a wealthy man who made his fortune in oil and farming has a strong commitment to retailing and limits his investments to that sector.
"So if you can spread the word about your project, and find someone whose interests mesh with yours, the chances of raising money improve dramatically."