Celestial Backers, a.k.a. Angel Investors, Growing as a Resource in our Area
Finding financing can be one of the biggest challenges for an entrepreneur hoping to make their ideas a reality. Traditional methods of financing, such as bank loans, government grants and subsidies, as well as personal investment, are sometimes not enough to make a go of it.
One type of financing that should not be overlooked, and that local efforts are focusing on, is “angel investor” financing.
A broad definition is that an angel investor is a person who invests in a new or small business venture by providing capital. These hallowed backers are typically individuals who have spare cash available and are looking for a higher rate of return than would be given by more traditional investments. Although it varies, an angel investor typically looks for a return of 25 percent or more.
Angel investors can help fill in the gap between the small-scale financing provided by family and friends and venture capitalists. The big advantage is that financing from angel investments is much less risky than debt financing. Unlike a loan, oftentimes invested capital does not have to be paid back in the event of business failure. And, most angel investors understand business and take a long-term view. Also, an angel investor is often looking for a personal opportunity as well as an investment.
The primary disadvantage of using angel investors is the loss of complete control being only a part owner. In many cases, your angel investor will have a say in how the business is run and will also receive a portion of the profits when the business is sold. With debt financing, the lending institution has no control over the operations of your company and takes no share of the profits.
Angel investors can take many different forms: family and friends, wealthy individuals, groups (successful businesspeople who come together) and more recently, crowdfunding.
The 1 Million Cups Mankato movement recently tapped into the minds of our community’s business leaders, mentors and entrepreneurs to do some angel investment mapping. This exercise is meant to be a resource for all of you, and will help us gain a greater understanding of the angel investing resources available in our region.
Question 1: If you are an investor, what are you looking for? (Particular industries, characteristics of the principals, detailed research?)
Responses from potential investors show they are looking for:
• Good rate of return
• To own a percentage of the business
• A plan to protect the original investment
Question 2: If you are a startup looking for investment, what are you looking for? (Particular expertise, characteristics of the investors, types of financial arrangements?)
Responses from those looking for an investor seek:
• People who don’t impose rules
• Investors that can take the tax credit
• Investors interested in what you are doing
• A plan that has an “exit strategy” built in
• Partners with expertise in agricultural, more specifically the developing cannabis industry.
• Plans for both a short-term or long-term business relationship.
Question 3: What angel or venture capital investment groups, or individuals, exist in the southern Minnesota area?
Responses: Participants speculated about which prominent business leaders might be interested in angel investing.
Question 4: What preparation should a startup business do before seeking investment?
• Coming up with a business plan
• Knowing exactly how the investor will help you/what you need from investor
• Proof of concept
• Clear list of negotiations/objectives
As indicated in some of the responses above, it’s important for any business person thinking about accepting an angel investment to be very clear about what the investor is bringing to the deal besides money, such as expertise in business operations or access to good suppliers. You would also want to develop an understanding of what the angel investor would be like to work with since this person could have their own conflicting ideas for how your business should be operated.
Question 5: What resources already exist to help a startup business prepare to seek potential investors?
Responses: Small Business Development Center (SBDC). It’s important to have a comprehensive business plan in place. As a small business, you’ll need it in order to secure financing from lenders or investors. The Small Business Development Center in Mankato is a good place to start. Its services are free: Small Business Development Center, 424 N Riverfront Drive, Suite 210, Mankato, (507) 389-8875.
1Million Cups Forum on Angel Investing will feature a panel of local leaders on March 4 at 8:30 a.m. at the Center for Innovation & Entrepreneurship in Mankato.
1 Million Cups is a free, nationwide program designed to educate, engage and accelerate early-stage startups. Join innovators and entrepreneurship enthusiasts in the southern Minnesota region every Wednesday at 8:30 a.m. For more information, visit 1millioncups.com/mankato or contact Yvonne Cariveau at the Center for Innovation & Entrepreneurship: 424 N. Riverfront Drive Suite 210, Mankato, (507) 389-1018.