Risk in private equity investing is inherent in the process. Often the greater the Risk, as in early stage the company, the great the Reward…if the terms are right. Lots of “ifs” involved in angel investing. You get the greatest return when you invest and the company has a low valuation. But that is often based on not accomplishing many milestones yet. Without the milestones to show a company can execute, the risk is greatest. So what are some key milestones a company should have at the major stages of development?

Start Up or Seed Stage:

1. Has a working business plan that delves into key areas of the business so they know what they do not know and what they will need to get help on. For example: Figuring out the actual cost of goods when manufacturing. Or will they hire sales reps or outsource sales etc.

2. Has protected the product and offering with patents, copyrights, or at the very least explored it and determined trade secrets are best.

3. Fully understand who their target market is and why they want to buy that product or service and what are they willing to pay for it.

4. Have assembled a good advisory board, even if they do not have the funds for a management team. They should be people that have relevant experience.

5. Has been able to raise a “friend and family” founders type round to at least get the $100,000 to $200,000 needed to build the balance sheet, pay for the patents etc, allow the CEO to actually be a full time CEO, and ultimately do the things that validate the business.

Early Stage:

1. Building upon the seed start up stage, as a company enters into Early Stage they should have a finished product and either customers already buying or at least have a serious pipeline of customers they have been courting and will be buying.

2. The money that comes in at this round should get them to cash flow positive.

3. They should be expanding management to include “execs with checks” or at least management that believes enough in the project to share risk through compensation from shares. No Hired Guns.

4. They should have analysis on the exit….do companies such as theirs get bought or go public. Who in their industry has done either? Who has bought companies like theirs. Because if they know what they are going to grow up to be, they can put a plan in place to get there. This is where you get your return, so this is important.

Expansion Stage

Angel Investors really do not play at the expansion stage, and at that point the risk is still greater than a public company borrowing money from a bank, but not near the risk associated with Early Stage or Seed Start up Stage companies.

At just about every stage, you can also mitigate risk though the use of key-man insurance to protect in case something happens to the inventor/founder etc. Also you can mitigate risk in the structure of the deal so that if the company has to go to a fire sale, you can get all or most of your investment back when the company is liquidated.

Angel investing can be very rewarding if the risk is appropriately mitigated.

Written by Karen Rands, President and CEO of Kugarand Holdings LLC; article source

With a turbulent stock market and a real estate market in serious decline, it definitely makes sense to seek out alternative investments. One possibility that many wealthy individuals overlook is making investments in private equity. This simply means investing in a company that is privately held rather than in a public company that offers its stock to the public over a stock exchange. People who make these sorts of investments are sometimes referred to as “angels,” a term that originated in show business, to describe individuals who provided financial backing for theatrical productions. It is now widely used to describe an investment in any business venture, particularly start-up companies. Many of today’s most successful technology companies received their initial capital from wealthy individuals.

An angel investor is sometimes called an accredited investor. That is defined as an individual who has a net worth of at least a million dollars not including the value of their residence.

Angel investing is riskier than investing in public companies because many times the companies seeking capital are early stage enterprises without significant cash flow or earnings, and it is difficult to predict how profitable the company is going to be. A significant number of early stage enterprises fail, so there is a very real possibility in any investment of this type that you will lose all of the capital you invested. The other significant element of risk is liquidity: private equity investments typically must be held until the company is sold or goes public, which could be 2, 3, or 4 years in the future. You can’t simply log onto your investment account and put in a “sell” order as you can with a publicly traded security. The upside potential is extremely attractive, however. It’s not unusual for angel investors to earn a 50% compounded return on their money. And angels also get the satisfaction of watching a small, unknown company become large and successful-and knowing they contributed to its success.

Angel investing is definitely an activity for high net worth individuals. Although the amount of investment in any one deal varies widely, it is quite high, $20,000-$100,000 or more. The average investment in a single company by an angel is $78,000.

How do you get started in angel investing? There are angel investor organizations, called angel networks, in many cities in the US, and not just in traditional centers of venture capital investment such as the San Francisco bay area, or Boston. Joining one of these and attending their monthly meetings is a good way to see how angel investments are made. The investment can be made as a group to spread the risk or on an individual basis, each angel conducting their own due diligence and deciding whether to invest or how much to invest. By becoming part of an angel group, it allows you to network with other angels and learn from their experience.

Written by Brian Hill, the author of Attracting Capital from Angels

For entrepreneurs who are looking for an angel investor to help them with their capitalization needs, one of the most difficult things to do is to actually meet with an angel investor and present his or her business plan. However, there are a number of things that an entrepreneur should bear in mind with regard to angel investors so that he will not have to worry too much about what will happen during the meeting.

Before the meeting

One of the first things that entrepreneurs should bear in mind is that even before an angel investor agrees to meet with him or her, the angel investor probably already has an idea of who he or she is. This is because of the fact that angel investors make it a point to “screen” who they meet with, and, as much as possible, they want to be introduced to entrepreneurs by a trusted friend or relative so that they would have a “reference.” This is because they want to meet with entrepreneurs whom they can have confidence in and trust.

If an angel investor is a family friend or was introduced by a friend or a relative, it would be good to hold a “pre-negotiation meeting” before the big meeting by inviting the investor to gatherings or parties. This is because doing so can allow the entrepreneur and the investor to get to know each other better before the meeting, which can also serve as a good opportunity to make a good first impression.

During the meeting

During the big meeting, an entrepreneur can build on the first impression that he has made by coming to the meeting prepared to effectively present his business concept and to answer any questions that the investor may have. To be able to do so, he or she must prepare a good business plan and bring some very important tools like a calculator, which can help him assess his business needs given the different options he would be presented with during the meeting. In case the investor agrees to invest, it would be a good idea to draw up a letter of intent. However, if the investor is a friend or a close family friend, a simple verbal agreement and a handshake would suffice before the papers are prepared.

To help relieve some of the anxiety that an entrepreneur goes through in looking for an angel investor, there are a number of ways by which he or she can make the meeting with an investor more pleasant. Some of these include holding a “pre-negotiation” meeting and preparing well for the meeting in order to leave a good impression with an investor and increase the chances of signing an investment deal.

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As with any investor, it can be expected that an angel investor would only put his money into a business that would provide the least risk on his investment. This is reflected in the investment decisions that such an investor would make, especially in the types of products or services that a business provides. Usually, angel investors invest in businesses that have the potential for long-term profitability. In recent years, the preference of angel investors has been in medical devices and medical related services, including medical billing services.

As a result, entrepreneurs who opt to go into businesses that make medical devices and provide medical related services have found it a little bit easier to get the interest of angel investors. However, this does not mean that anyone who decides to go into these kinds of businesses would get an angel investor to invest just like that, as there are things that entrepreneurs need to do first before they can sign a deal with an angel investor.

What angel investors look for

Apart from a presenting a potentially profitable product or service, businessmen need to prepare a number of things and equip themselves with a number of skills that would increase their chances of landing a deal with an angel investor. Among these skills, one of the most important is competent management skills. In addition to this, an entrepreneur needs a good business plan, which identifies the size of the market, the competitive advantage of his business, and financial forecasts.

On the other hand, there are also a number of things that entrepreneurs should avoid when they are presenting their business concept to an angel investor. Some of these include and having unrealistic valuations for the purpose of making his business more attractive. This is because angel investors are very astute businessmen, and they can tell if you are trying to fool them. If they catch you doing it, you can kiss their investment goodbye.

Recently, angel investors have become very interested in the medical field, which has made it easier for entrepreneurs who are in the field to gain access to capital. However, even if an entrepreneur is in the right type of business, there are still a number of things that an entrepreneur needs to prepare and skills that he has to learn before he can land an investment deal with an angel investor.

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When presenting your business plan to an angel investor you must understand that they will be very interested in your spreadsheets and proformas, but you must also realize that it is typically an entrepreneurial optimistic approach, which causes problems with proformas.

Therefore, you should have dueling spreadsheets; that is to say the spreadsheets, which take your best guess and double the time, double the expenses to compete with your optimistic approach. You should be able to present both of these to your Angel Investor; who chances are is a retired business person with a little bit of financial savvy.

This will show your Angel Investor that you indeed are a rational thinker and concerned about the money as well as the truth. If the Angel Investor cannot trust you your chances of being funded are nil. An angel investor is betting on the jockey not only the horse. As an entrepreneur you must be honest with yourself as well as your financial partner.

They want to make sure you believe in what you are doing and that you also have risked your own capital, time and energies into the new business. Angel investors want you to succeed and often they also like to give their input and if you end up taking their money for your startup, the need to realize that their input needs to be taken seriously.

Angel Investors are typically much better investors for a long-term business plan that Venture Capitalists, although they do not come usually with the incredible network to help you succeed. Venture Capitalists are more interested in themselves and making money on their investment then what you get out of it or the future of the business with you in it. An angel investor is interested in you, the future of the business and the possibility of making a whole lot of money on their investment. Please consider all this when presenting your business plan to an Angel Investor.

Written by Lance Winslow, Article Source

Equity capital, unlike debt capital, is when someone or some company invests in a company in return for shares or stock in that company. Angel investing is generally done as such an equity investment.

This money does NOT need to be paid back to the investor.

Rather, the investor generally gets paid when there is a liquidity event, which is the event through which the company “cashes out” such as being sold to another company or having an initial public offering or IPO. Note that a liquidity event is also known as an “exit.”

Note, however, that in some angel investments, angel investors can be paid dividend payments or profit sharing over time, and sometimes angel investments are structured as convertible promissory notes. Convertible promissory notes are loans with a fixed interest rate which, at maturity, can be redeemed for cash or shares of stock in a company. So, in essence, they are loans that can be converted into equity.

As you might imagine, equity capital is much riskier to investors than debt capital. As a result, angel investors expect to earn higher returns than they do with debt.

Specifically, angel investors generally expect to earn returns of approximately 30% from their private company portfolio. Note however, that you cannot simply offer an angel investor the chance to earn a 30% average return on investment (ROI). Why? Because most angel investments fail to reap any ROI. As such, if half of their investments fail, they would need to earn 60% returns on those that succeeded to realize a 30% average return.

Written by Dave Lavinsky, article source

In order to consider investing, angel investors must believe that the company has great potential to achieve a liquidity event, and one that enables them to earn a significant return on their investment. The following factors imply that a company has this potential.

The first criterion is scale or the potential for the company to achieve significant annual revenues. If a company expects to raise venture capital after the angel round, it must have the potential to earn annual revenues of $50 million to $100 million within five years.

Conversely, an angel investor, when no follow-on capital is required, might be willing to invest in a restaurant or website that has the potential to generate hundreds of thousands or a few million dollars as long as a clear path has been laid out regarding how they could get a sizable return on their investment.

The second criteria is barriers to entry. Barriers to entry are those things that make it difficult for another firm to compete against you, such as patents or proprietary technology, a unique location, and long-term customer contracts.

The third criteria is having a strong management team with relevant experience and successes under their belts. The angels must believe in and be comfortable with both the founders and the key operating personnel of the company.

The fourth criteria is that angel investors need to feel confident of your exit strategy, mainly that the chances are good of eventually having another firm purchase you or your firm going public. It is through your exit strategy that these investors profit from their investment in you.

A final criteria, while not necessarily tied to liquidity potential, is that angel investors tend to only invest in local companies. Angel investors often like to invest in companies that are close by so that they can visit them often and participate in Board and other meetings. In fact, according to the Center for Venture Research, 70% of angel investments are made within 50 miles of the investor’s home or office.

Written by Dave Lavinsky Article Source