Business Strategies
by jerome s. osteryoung, ph.d.
O Investor Divine
Most of us think of entrepreneurs as the people with great ideas, but that's only half
of the equation. Entrepreneurs are the people who get the great ideas off of the drawing
board and out into the marketplace.
Making the leap from drawing board to marketplace requires many talents - and a lot of
money. Among the sources of financing for entrepreneurial firms are professional venture
capital firms or those firms that specialize in investing in risky private ventures.
However, these professional venture firms only fund a total of about 1,000 to 2,000 deals
in a year. The probability of an entrepreneur getting this type of funding is very small.
There is, however, another more likely resource for funding. The primary providers of
funds to entrepreneurs, besides the entrepreneur and his family and friends, are private
investors referred to as angels. These investors put in between $50,000 and $500,000 per
deal. Angels provide a total of somewhere between $10 billion and $20 billion in funding
every year to entrepreneurs; on average, angels finance about 30,000 new deals a year.
As with most other entrepreneurial activities, finding the right investment angel
requires innovative thinking, a plan, and plenty of perserverance.
Locating an Angel
According to surveys, the typical angel is in his 40s or 50s and is well-educated.
Ninety-five percent of angels have college degrees and 51 percent have graduate degrees.
Of those with graduate degrees, 44 percent have advanced degrees in a technical field and
35 percent have graduate degrees in business or economics. The angel is typically a
self-made millionaire entrepreneur who has the wherewithal and the appetite to take a risk
on someone else's success.
How do you find angels? The best source is to start with those you know. Ask your
friends, relatives, and business acquaintances (including your lawyer and accountant) if
they know of any potential investors. Introduction to an angel from someone he knows gives
you an obvious advantage.
That's the first step, and it's the easiest one. Once you've exhausted that resource,
however, where do you turn?
In Florida, there is a publication called the Florida Venture Finance Directory that lists firms and individuals who invest in entrepreneurial companies. The directory,
published by Enterprise Florida, costs $13.60 and can be ordered by calling (407)
316-4646.
Additionally, the Jim Moran Institute (JMI) maintains a venture capital network. The
purpose of this computer network is to match entrepreneurs who need funding with angels
who are willing to invest. The angel remains anonymous until he finds a deal that
interests him. This service is provided free of charge through JMI; for additional
information, call (800) 821-7515.
Most major cities in Florida have venture capital clubs that hold monthly meetings.
During these meetings they typically have one or two entrepreneurs present their business
plans. In many cases, these groups have been very successful venues for raising funds.
CLOSING
THE DEAL
After you have identified a potential investor, you need to contact him directly.
Dropping off a letter in person with your business plan is best but may not be practical.
In your cover letter and in the executive summary of your business plan it is best to
highlight the following items that are of critical importance to the angel:
When and how are you planning to harvest the deal (get the investor out, e.g. IPO or
purchase by a larger firm).
Typically, anything less than 25 percent will not be considered acceptable in an equity
deal.
Who's on the management team. The investor will look first to the credibility and
experience of the management team. The investor is betting on the jockey (management) to
ride the horse (the business) to the winner's circle.
What percentage of the business do you envision giving up for the money from the
investor? This can be worked out quite simply with a mathematical formula that will show
the amount of equity needed to be given up in order for the investor to realize his
desired rate of return.
Majority ownership of the business does not have to be given up if adequate controls
are put in force to protect the investor. Some of these controls include: the number of
seats on the board of directors if performance goals are not reached; limits on the
salaries and perks paid to the management; and types of approval necessary for large
expenditures.
Try to find angels who bring more than just money to the table. The best type of angel
is one who brings both money and some type of experience that is lacking by the management
team.
You should prepare a list of potential investors at least six months before you think
you will need the funds. Finding an angel can be a long and time-consuming process that
won't necessarily conform to your schedule. Perservering in the money hunt, however,
determines the profitability -- and the survivability -- of the firm.
Dr. Osteryoung is the executive director of the Jim Moran
Institute of Global Entrepreneurship in the Florida State University College of Business.
SIDEBAR
Where The Angels Are
Look close to home. Most angels invest in deals that they can drive to in
half a day.
Look for individuals who are familiar with your technology or targeted market. These
angels will be quick to understand and appreciate your proposal.
Many angels are active in civic and charitable affairs. The people who sponsor such
organizations are a good source of potential angels. Look for their names in the local
paper and on boards of directors.
Most angels are risk-takers in their leisure-time activities. Therefore, check with the
U.S. Coast Guard and Federal Aviation Authority in your area for the names of owners of
aircraft and yachts. This is public information.
May/June 1998 -- Florida Business Insight, 501 N. Adams St., Tallahassee,
Fla. 32302
(850)224-7173, insight@aif.com
