As Entrepreneurs we are all well informed as to how difficult it can be to find capital for our business when needed. Family and friends may be a touchy subject and injects an uncomfortable situation and may be a line we are not willing to cross. Business loans are certainly an option but what if we need more capital than we qualify for, or our business does not meet all parameters? We hear a lot about Angel Investors, but what and where are they and do I have an enticing or large enough business to attract one? I certainly have a lot of questions as I look to understand the world of Angel Investing, it is something that I personally do not know much about. I will look to learn about that world over the next 7 weeks as I review the book “Winning Angels: the seven fundamentals of early-stage investing” by David Amis and Howard Stevenson for my WCU Entrepreneurial Feasibility Analysis Class.
The book is written as a guide for Angel Investors to organize their business, develop a targeted result, as well as establish an investing strategy that will maximize their efforts. Amis and Stevenson provide a very detailed outline for an Angel Investor of every size and type. The book allows an Angel to self-evaluate what they may want from their business through detailed step-by-step actions as well as real-life chronicles of what has worked well for other Angels.
The first “fundamental” the book discusses is sourcing, as in how an Angel finds and sorts their potential investments. The authors have divided sourcing activities into four groups of activities that will give Angels focus to what prospecting deals they will want to make. The four activity groups are:
- Preparation Activities
- Networking Activities
- Visibility Activities
- Focus Activities
As the book begins with challenging the investor to be clear as to how much time and money they want to put into the endeavor. These four activity groups help the Angel to source a consistent flow of investment opportunities to come their way. Depending on how many deals they decide to do and/or what types of opportunities they are searching for, these activities will help them to attract potential deals. The four Activity Groups are sub categorized into 18 activities that the Angel can perform with some sort of measurable response. Amis and Stevenson go as far as to detail the time investment as well as how many deals that an Angel should expect to receive from the action.
Reading the book, I quickly can see how these activities are many of the same actions that we take as entrepreneurs ourselves. Network for social capital, one pager vs. Elevator Speech, engage in speaking opportunities, etc. We are all performing actions for a measurable positive response to our business.
Amis and Stephenson review the correlation between Quality and Quantity and how different combinations of each will most likely differ between all Angel Investors. They mention how Angels will need to consider each separate issue to manage (pg. 56). They point out that performing the Networking and Visibility Activities will result in increased deal flow there will certainly be some differing results based on who the Angel is as well as their circumstances. Example being a “famous” Angel will have and easier time sourcing deals than an “anonymous” Angel and their efforts to achieve the same deal flow may differ vastly. As for the consideration of quality, an Angel must decide if they are going for the “Shotgun” or “rifle” approach to sourcing deals. Amis and Stephenson point out that newer less experienced Angels are more likely to take the “shotgun” approach where more tenured Angels tend to protect their time and focus on more specific types and measurables when they are looking for deals. Each Angel must find the right combination Quality and Quantity as both efforts may result in similar deals, with the “shotgun” approach most likely putting forth the most effort.
In the residential construction industry Angel Investors are more common than one may think. As all builders will have a relationship with multiple lending institutions, the terms of mortgage lending may not provide the same flexibility as an Angel Investor. The equity needed, as well as the repayment terms for a mortgage can be of a hinderance for a builder. Many times, for a builder to grow or take advantages of opportunities they will need more flexible lending terms. An Angel Investor may make the most sense as they will look for a cut of the profits for funding all or most of the upfront equity needed to start a project. Most of the time an Angel Investor that is interested in lending into the real estate world will either have a background or a current career in the business.
When a builder is faced with an opportunity that will require more equity and cash flow throughout the life of the project, Angel Investors may just be the only way to go. A typical mortgage lender may want a large sum down as well as a repayment structure that pays them back at a faster rate than the positive cash flow for a vast portion of the timeframe. Many times, builders and developers are faced with only about the last 10% of the project being of positive cash flow for themselves, this can be a large problem for the 90% of the project. At a certain growth metric of my business I will actively look and promote a profitable position for an Angel Investor. Thus, reading “Winning Angels: the seven fundamentals of early-stage investing” by David Amis and Howard Stevenson will be an important lesson into the viewpoint of many Angels.
Amis, D., & Stevenson, H. H. (2001). Winning angels: the seven fundamentals of early-stage investing. London: Financial Times Prentice Hall.