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Guest post by: Andrew Nester Become an Author

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Most websites and groups that carry the tag Angel Investor today are no longer true Angel Investors as the term was originally coined in the early part of the 20^th century to define investors that REALLY made seed investments typically in the $10K-$150K range in startup Broadway plays and businesses in their formation stage. In the 1970's Angel Investors became more well known for making seed investments in the new booming technology age and grew from there.

Individual Angels of late have joined formal networks that have moved into what used to be the lower end Venture Capital investment market that was vacated when Venture Capitalist moved into larger, in most cases $10M plus, minimum investments. The current so called Angel Investor Networks now prefer $500K plus investment deals with a large upside that is more on the order of mezzanine funding than seed funding. Some say they will make smaller investments, and a few will, based on mezzanine funding type terms; your product or service is developed, you are generating revenue, you can show high gross margin potential, you can get to cash flow breakeven rapidly to support some level of debt or can justify a higher valuation to raise additional funds and you have a revenue potential of at least $20M per year in five years with a minimum return of 32% over the five year period. Some like to see upwards of 60%. Under this scenario they are not Angel Investors, they are now the new Venture Capital investors.

From the research I have done the following should be the definitions applied to various levels of investors today:

True Angel Investors: A very small informal group or an individual that has made money from starting and running their own business. They understand making seed investments in startup companies with the associated risks and rewards. The have been there done that and like to play a role in the venture to help it succeed. These investors are out there but they are hard to find. Today true Angel Investors are primarily found through individuals that know people who dabble in angel type investments or through various social media venues, blogs and forums. Not on websites touting the label Angel Investors.

Historical Angel Investors: They have formed formal investment networks consisting of multiple individuals, sometimes into the hundreds, and work with other networks to make joint investments. They have become Mezzanine type Investors requiring the same criteria be met to get funding. Some individuals in these networks may make independent investments but they are difficult to find within a network and weed out of the network for your particular investment. Worth a try if you can build a relationship with an individual in the network that can introduce you to others who might make standalone investments outside the network. Their criteria for investing are now more stringent. Ideal investment is a company that has a unique and protectable advantage in its market and addresses a critical need. The company should be beyond the early stage of growth. It should have demonstrated a need for and acceptability of its product, service or technology in the marketplace. Total capital needed to execute the business plan to success should be modest to avoid excessive dilution to Angel investors. At least the beginning of management team should be in place. Sounds like mezzanine investing to me. Not true seed investing.

Historical Venture Capitalists: are now, in my opinion, Investment Bankers, Pre IPO, Sale or Merger investments. There is very little venture risk in what they do today versus in the past except on rare occasions. Their terms are still like their old handle, Vulture Capitalists. They want to get in and get out with a high return as soon as possible, 2-3 years. If you stumble you are out.

I'm sure there are many out there who will take issue with this. If they do ask them when the last time was they tried to raise money. Not over the last 3-5 years would be my guess.

Angel investors still play a critical role is starting and building companies. A true angel investor can bring more value to your business than money and are worth the effort to find for seed investments. Typically the person(s) will want to take a role in the business as a director, advisor or possibly as a full or part time participant in the day to day building of the business. If this is the case you have to qualify the person just like they want to qualify you and your business opportunity. In doing this you have to build a relationship and make sure they are someone you want to work with before you take their money and invite them to participate at some level in your business. If you don't more often than not you will have conflicts with the investor that could end up hurting your businesses growth and future funding efforts. They have to be aligned with your business culture and plans.

True Angel Investors are out there. They still can provide the much needed cash and support to get your business to revenue producing and growth giving you a better chance of success. True angel investors are just harder to find. You can waste a lot of time looking in all the wrong places. When you find one make sure there is a match.

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