Yesterday, in my posting about Venture Capitalism I made mention of the term angel investor. This is a common term in the field of investments referring to a person who is interested in using her own money to invest in an entrepreneur who is in need of immediate cash to get a project up and rolling. It is a more informal pattern of investment than that described in Venture Capitalism.
- The angel investor is using her own money, not a fund gathered from serious capitalists.
- The process of loaning the money is more informal.
- The criteria for loaning is based more upon trust in the enthusiasm and energy of the entrepreneur than upon a proven track record in business.
- The goal is only partially economic. For the most part it is an altruistic desire to affirm entrepreneurism and give people a start in joining the business world.
- The loan is usually for a smaller amount and carries less of an interest burden.
- The angel investor has no desire to be a part of the entrepreneurial organization.
- The time frame for repayment is adjusted to the ability of the entrepreneur to pay back.
Lest this sound like a “mom and pop” method of operation, it is important to know that most angel investors are, themselves, successfull business owners who want to share in the industry. They tend to be savvy and intelligent about things related to business. Rather than scrutinizing business plans that are hypothetical and frequently expansive and exaggerated to impress a capitalist, they use their skills in assessing people to make their decisions about funding. After years of hiring and firing people they have a tested credential in determining the capability of someone to produce.
They also tend to be nearby. Angel Investment contacts are advertised in regional or state groupings. They are the entrepreneur’s neighbors, in a sense. Local laws, tendencies, economic patterns, and viabilities are not esoteric or generic. They are well-known and practiced.
Angel investors are not competitors to venture capitalists. To the contrary, they enter the process at different times and for different reasons. The result of a successful angel investment will be readiness to approach venture capitalists. The angel investment provides the opportunity for developing the proven criteria to present in a formal business plan to a venture capitalist.
There are consortiums of angel investors in every state. They are independent of each other, but collaborative in their ability to “be there” for applicants. If one angel is not capable of funding an enterprise, a referral to another angel may be forthcoming. One man I heard being interviewed on NPR spoke about making approximately 5 ventures a year in the amount of $10-50,000. His energy for this was electric. He and his wife relish the knowledge of the number of young entrepreneurs who have benefitted from their generosity and their willingness to risk.
Photo credit: angel investor