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Heaven Sent: The client-angel relationship can be a godsend. But you have to make it happen.

by Brian Walker

April 2002

At first glance, angel investors and entrepreneurs appear to be a match made in heaven. A client may tell you, "I just need some capital to get me going. Then I'll hit the big time." Meanwhile, an angel investor may say, "If only you could introduce me to just one good company."

The demand is there on both sides. Each party wants something, and the supply certainly isn't limited. But like finding the right person to marry or even the right apple at the supermarket, selection is the determining factor. It doesn't matter that there are thousands of entrepreneurs looking for capital and thousands of angels looking for investment opportunities. What matters is making a good match.

Increasingly, incubator managers find themselves in the position of matchmaker, introducing the right client to the right angel investor. NBIA Review interviewed managers who have successfully helped clients meet and impress angel investors. From informal introductions to group presentations to complicated databases for tracking angels, there's certainly more than one way to pluck an angel from heaven.

Wings alone do not an angel make

What exactly is an angel investor? The U.S. Securities and Exchange Commission defines an accredited angel as an individual who invests in start-up companies and has a net worth of more than $1 million, personal income totaling more than $200,000, or total family income of more than $300,000.

According to the Center for Venture Research at the University of New Hampshire at Durham, there are about 350,000 angels investing $100,000 to $2 million per deal and more than $35 billion of capital annually in the United States. Although the average angel investment is far less than the average venture capital investment, it's exactly what early-stage companies need. Moreover, angels' investment interests go beyond financial considerations.

Angels often seek investment opportunities in their communities or regions because they want to give back. And since they usually are accomplished entrepreneurs, they can bring valuable local knowledge of a specific industry and extensive connections that may result in additional investors, customer contacts or leads on management-team recruits. Angels' reasons for taking particular companies under their wings can range from the practical to the sentimental.

"Maybe your client is the son or daughter they never had," says Andrew Sherman, a capital partner in the Washington, D.C., office of McDermott, Will & Emery. "Maybe that client reminds them of themselves when they were younger, or perhaps they just want someone to mentor. Maybe they've retired and need to get out of the house and feel useful and active. Maybe they have expertise and relationships that they want to share, or maybe they're just bullish on your industry and looking for a way to participate – it's your job to discover the reason and structure your relationship accordingly."

At such a critical time in a company's development, the advice and know-how of an angel can be more beneficial than the investment itself. With the ability to provide so many tangible and intangible benefits, angels could have every new start-up in their community knocking at the door if they're not careful. To combat this, they tend to keep to themselves.

"Yes, angels certainly want to protect their privacy," says Sam Florance, director of the Gateways Program of the Purdue Research Foundation in West Lafayette, Ind., "but often they are very interested in seeing quality proposals. Therein lies both their conflict and the reason for their elusiveness."

Identifying angels

So how do you go about finding these elusive investors? "There's really no other way to do it than simply working with the people you know," says Rob Beamish, director of Calgary Technologies' Concept to Capital (C2C) Program in Alberta, Canada. As with many of an incubator manager's most important tasks, it all comes down to networking. You have to track down angels through people they know, have invested in or work with.

"Start with bankers and find out who are the wealthy individuals in your community and which ones represent 'old money' and 'new money,'" says Randy Goldsmith, executive director of the Oklahoma Technology Commercialization Center (OTCC) in Oklahoma City. "Those who have made their money as founding entrepreneurs [i.e., new money] make the best angel candidates."

Charles D'Agostino, executive director of the Louisiana Business and Technology Center in Baton Rouge, La., recommends talking to the Chamber of Commerce and local foundations. If representatives of these groups are familiar with your incubator and its quality, they may be willing to point you in the direction of community members who have made sizeable contributions to local organizations. He also suggests getting your staff out into the community as volunteers to get to know the community's workings.

Don't forget your own contacts, both professional and personal. Your board of directors may be as invaluable a source of contacts as your friend down the street. "Ask around, show others your [clients'] outstanding business plans, and let them be impressed enough with the proposal (and with you personally) to feel as if they're doing their angel-investor friend a 'favor' by making the introduction," Florance says.

Yet another way to learn about angels in your community is to network with "gatekeepers." These individuals, who serve as buffers between angels and the outside world, report qualified deals back to their respective angels. They can facilitate your search for angels since they don't have to remain elusive when investigating deals. "Gatekeepers are usually lawyers, bankers, CPAs and consultants," says Martin Kaszubowski, director of the Hampton Roads Technology Incubator in Norfolk, Va. "Sometimes they're venture capitalists who will refer deals that are too small for their funds and/or outside their investment parameters." Again, community networking will lead you to the gatekeepers in your area. In many cases you can simply look up lists of management and marketing consultants to find possible gatekeepers.

OTCC's Goldsmith has had particular success finding angels by using a take-the- bull-by-the-horns approach. Goldsmith sought out wealthy individuals in his community through banks and networking forums and appealed to their entrepreneurial instincts by explaining the benefits of investing close to home. "The carrot that I hang out in the marketing pitch is that any community that does not have the advantage of early-stage investment capital is at a severe weakness compared to the community down the road," Goldsmith says.

Rather than seeking out multimillionaires, Goldsmith organized smaller-net-worth individuals who together have provided big investments. He identified individuals who were willing to join friends or community members to form angel groups, each targeted to raise $1 million of investment capital and usually comprising 10 angels contributing $100,000 each. Having consistently introduced angels to good investments for five years, Goldsmith has more than 300 angels organized into 12 investment groups that have provided more than $300 million of investment capital in the past 24 months alone. "Angels tend to come to us now," he says.

Getting to know you

Eventually, your networking and investigative work should help you develop a list of angels in your community. Your next task is to get yourself on a first-name basis with those individuals. You need to find out what types of companies the angels like, what companies they have previously invested in and which deals you have already marketed to them - and record that information. It will allow you to choose to meet with angels whose tastes and skills would best match investment-ready clients.

As you meet angels, make sure they're accredited to ensure a stable investment relationship. Since there is no formal certification process to ensure an angel's accreditation, Goldsmith recommends developing a form for potential investors to sign stating that they meet the qualifications of an accredited investor. This will provide legal protection for your incubator in case of fraud or any other complications.

You should also make sure your angels have the skills they need to work with your particular clients. OTCC has developed an angel-training curriculum that enhances the basic skills angels already have. "Angels typically understand valuation, for instance," Goldsmith says, "but they might not be familiar with the quantitative methodologies that are used to calculate a valuation." OTCC holds monthly angel meetings exploring valuation and other topics including state-specific tax credits, explanations of pending investment legislation, securities as investment opportunities and investment legalities. "In many ways we're incubating the angels," Goldsmith explains.

Through your communications with angels, you'll also want to get them acquainted with your incubation program. In her first meetings with angels, Katherine Kim, president of Communications Technology Cluster in Oakland, Calif., quickly learned that promoting clients alone wouldn't close a deal.

"Rather than investors just hearing about good companies, they needed to hear about the incubator, which has produced numerous good companies," Kim says. Everyone will tell an angel that they have good prospects for investment, but incubators have the unique position of being able to highlight their various success stories of profitable companies. "In doing so, it became apparent that our incubator brand meant something, that angels valued a start-up coming from the incubator."

One of the best ways to get to know angels – and for them to get to know your incubator – is to get them involved as client mentors. For angels, mentoring is often the main draw of an investment relationship. "And occasionally they will even end up investing in the companies they've been mentoring," Kaszubowski says. A lot of the time it's easier to ask angels to share their knowledge than to open their checkbooks.

Matchmaker, matchmaker

The ultimate goal of building angel relationships is to make investments a reality by matching clients with investors. But that, too, can be a bit tricky. "You can't dance any old deal in front of them," D'Agostino says.

Not every client in your incubator is going to be ready for angel investment. "We have various milestones we track for our clients that have to do with revenues, profitability, maturity of the management team, development of strategic alliances, etc. to determine just who is ready," Kaszubowski says. These milestones are mostly client specific, but a screening process is necessary to ensure quality prospects for investors. As clients become investment-ready, organize them into a portfolio that you can share with angels.

To make a good match, you also have to know the particular types of investments your angels are interested in. Indeed, one of angels' biggest advantages – that they advise and take an interest in companies – can be a disadvantage when incubator managers try to shop around clients. If an angel likes technology companies, then you're only going to annoy him when you present a stellar manufacturing firm. "How do you know what sports your friends like, what their preferences are in restaurants?" Florance asks. "That general awareness comes from regular, nonspecific contact over time." Again – it's important to spend quality time on effective networking.

You can share your portfolio of clients with angels in a restaurant, a formal investment forum, an elevator or anywhere the opportunity presents itself. Perhaps the simplest way to introduce a client to an angel is to provide the angel's contact information to the client – with the angel's blessing, of course. If your clients are adequately prepared, you shouldn't be afraid to let them make deals on their own.

If you have a client that you're sure a particular angel will be interested in, don't hesitate to formally plan an appointment to speak to the angel. On occasions where you meet with both your client and the angel, try to stay away from the actual deal-making. Angels and clients should be solely responsible for this process. (See “Court angels, but stay out of legal hell.”)

An invitation to your incubator can also be helpful. "It gives the angels a chance to kick the tires a little bit," D'Agostino says. They can see the company's work environment, an often-overlooked element in an efficient and to-the-point business plan. Additionally, it provides angels a chance to see your incubator, which drives home the fact that, as a member of the incubator, your clients are less of an investment risk.

For client-angel introductions on a much larger scale, consider organizing or participating in angel forums. These events bring together angels and potential investments, allowing angels to see a variety of companies while giving the companies an attentive audience of investors.

In Calgary, Beamish's C2C provides a client training program that culminates in an investment forum. The program begins with a 12-week boot camp that readies incubator clients and other companies in the Calgary community to make their pitches to angels and other investors.

"We have a pool of approximately 60 professional service advisors and leadership coaches," explains Beamish. "They are attached to each company based on the needs of that company and contribute their time at no charge." These coaches help with everything from forming a business plan to deciding what a CEO should wear when he or she presents. And even when a company is deemed investment ready, its training isn't finished. Beamish then invites a friendly audience of business professionals to watch and give feedback on company presentations, pointing out the problem areas.

From there, C2C's in-house crew organizes a half-day of 15-minute presentations before investors. These presentations usually consist of concise summaries of business plans. Companies tell investors why they would make good investments. "The C2C program has two simple warranties," Beamish explains. "For the companies, if you make it through the program, you will present to an audience of early-stage investors. For the investors, you will see investable opportunities." (For more tips on hosting an investment forum, see “The eight commandments of angel presentations.”)

For richer or for poorer

Once the deal is done and the match has been made between an angel and a client, incubator managers often find they have little more to do. "We continue to provide support, counsel, technical assistance, information and additional networking opportunities," Florance says. "We just do it with an awareness that there's an individual investor involved as well."

But don't forget your angels just because a client gets funded. Make sure they know that you are still looking out for them. You can accomplish this any number of ways, from producing a quarterly newsletter for your angels to simply saying "hi" at a social gathering. "We try to keep them aware and in the loop ahead of time, telling them at times about prospects that should be ready soon," D'Agostino says.

Building a network of angels takes a lot of work, but the time you spend nurturing the relationships is an investment in your clients. "The best cases," Kaszubowski explains, "are usually those where an investor comes in very early, investing mostly on faith and trust in the CEO or the technology or both, and then has his confidence validated when others get interested enough to want to invest as well."

This synergy, more often than not, is what can propel a company to the next level – where profits and success fly in, like an angel from heaven.

Virtual heaven

Incubators aren't the only ones matching entrepreneurs with angel investors. Although only a small percentage of start-ups currently use online sources to find funding, the number is growing. These Web-based forums usually offer password-protected databases of companies that investors can scour for investment opportunities. Many incubator managers have used national services such as ACE-Net ( and ( to list their clients.

Although these online databases allow investors to look at companies from all over the country, many angels are interested only in looking at deals in their community or region. Angels want to be able to do lunch with the CEO, tour facilities, and, sometimes, get their hands into the thick of the business. These kinds of things are hard to do when your investment is in a different state.

Many NBIA members have indicated they would like to utilize features that these national databases offer, but on a regional or local scale. Few of those managers, however, have the time or technical means to build such a database. In response to this need – and enthusiastic reviews from a volunteer panel of NBIA members – NBIA has added LocalFund ( to its Partner Program.

LocalFund's software and resources can help incubators set up a local online database where angels and other investors can log on to look at prospects in your community. The incubator maintains full control of the network, determining which companies are listed. Of course, after an angel chooses a company online, an in-person meeting will always follow.

"Online matchmaking doesn't take the place of 'more conventional' means," says Cliff Grant, president of LocalFund, "it just expedites the initial meeting process."—BW

Court angels, but stay out of legal hell

When it comes to client-angel relationships, incubator managers shouldn't take their role as investment intermediaries lightly, because it carries important legal considerations. There are two types of investment intermediaries, finders and brokers, and it is crucial to understand the difference.

A finder assists a company with locating investors. Finders bring together companies and angels, but after the introduction, their involvement in a particular deal customarily ends. "In the narrowest sense, a finder's activities are limited only to providing the company with a list of investors' names and contact information," says John Marlow, a partner with the law firm of Crosby, Heafey, Roach & May in San Francisco. Marlow works with incubators and angel investors, and is also on the board of directors of the Renaissance Entrepreneurship Center in San Francisco.

A broker is in the business of affecting transactions in securities on behalf of another. They work so closely with a particular angel investor or group that they could be considered to be brokering deals for angels rather than simply finding investors for companies. "In the strictest sense, if you assist companies with their financing negotiations, attend meetings with investors, contact investors directly about a company, or have a fee structure that is based on the success of the financing or is a percentage of the capital raised, your activities may label you a broker," Marlow cautions.

Unlike finders, brokers need to register with state and federal securities authorities. Incubator managers generally are not registered brokers, so those who provide assistance that goes beyond that of a finder could be acting as unregistered brokers, subject to fines by state securities authorities. Whether knowingly or unknowingly, most incubator managers who act as intermediaries in the capital-raising process walk a fine line between being a finder and a broker.

According to Marlow, no single action will label you as an unregistered broker. The terms broker and finder are best understood through case law. Courts have tended to weigh a number of factors in determining whether someone is acting as a finder or broker. "Normally, the state and federal authorities become aware of an incubator's activities because someone, often a disgruntled investor, notifies them," Marlow explains. "From a practical standpoint, this is far more likely to occur if a deal is unsuccessful or an investor feels misled or is unhappy with the outcome."

Nevertheless, managers should be careful when helping clients secure investments. Marlow suggests that managers review their activities closely with legal counsel familiar with these issues. Following are guidelines to consider to avoid being classified as an unregistered broker.

  • Don't become involved in the deal-making. "When possible, finders' duties should be limited only to providing investor contact information to clients," says Marlow.
  • Don't make qualitative statements about a client or deal other than to say something about the quality of all companies in your incubator as a general endorsement. Angels should handle their own due diligence directly with your clients – you are not there to advise the investor.
  • Be careful with your incubator's fee structure. Charge a flat fee for your finder's activities so that payment isn't tied to whether or not your client receives funding. If you are going to receive equity in your tenant-companies, Marlow suggests service agreements specifically stating that the incubator will receive equity in a client company in return for general services only, not for capital-raising assistance.
  • Always prescreen angels to make sure they are "accredited investors" as defined by the Securities and Exchange Commission. Additionally, make sure that invitations to client-angel presentations are not forwarded beyond your own angel network or to nonaccredited investors. "If you don't have a pre-existing business relationship with the people who are contacted regarding an investment opportunity, you could be deemed to be undertaking a public solicitation, or even a public offering, on behalf of the company," Marlow says. Many federal and state laws prohibit general solicitation and advertising in connection with the private sale of securities.
  • Always contact an attorney knowledgeable in federal and state securities laws before becoming involved in the capital-raising process.—BW

The eight commandments of angel presentations

Angels are finicky investors. After all, they can afford to go elsewhere. A good first impression is essential to keep angels at your side, especially when you're hosting client presentations for angel investors. You have to show angels that your incubator has a reputation of producing quality companies to maintain an active network of returning angels. Katherine Kim, president of the Communications Technology Cluster in Oakland, Calif., has compiled the following tips to make your angels, and ultimately your clients, happy at angel investment forums.

  • 1. If you haven't hosted an angel presentation before, attend other events first to see what is involved. It never hurts to see how your colleagues are handling similar events.
  • 2. Make sure the presentations are compelling. Your clients should keep a quick pace and include specific details that give angels enough information to say "I want to invest" or "I don't want to invest."
  • 3. Remember that the quantity of presenters doesn't matter as much as their quality. Angels do not want to waste their time – they'd rather see two solid presentations than 10 weak presentations.
  • 4. Not all of your incubator clients will be ready to make presentations at the same time. To maintain a regular flow of high-quality companies at your presentation, consider inviting – and screening – strong local companies that are not part of the incubator.
  • 5. Pay attention to logistics beyond the presentations: Are there enough chairs? Do you need to prepare food? Do you have appropriate lighting?
  • 6. Find funding sources or sponsorship for the event. Consider charging presenters and attendees participation fees, or charge fees for a presentation boot camp where clients can get skills to effectively make presentations to angels.
  • 7. Angels want to build their own networks. Allow time for informal socializing so they can meet other angels.
  • 8. Your clients aren't the only ones making a presentation. Remember that your incubator is putting on a show of its own. If angels are impressed with your incubator, they will perceive less risk investing in your clients.—BW

Keywords: angel investors/network, business financing, capital access, networking activities – client, presentation skills

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