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What's a napkin to you?
If you see a place to wipe the spaghetti from your mouth, never mind.
But if you see words and arrows and exclamation points and dollar signs appearing – in other
words, a business plan – you might be ready to talk to an angel investor.
"An angel is a solo practitioner, investing his own money," says Charlie Paparelli, president
of
Paparelli Ventures and himself an angel
investor. Angels are looking to invest in early stage companies, from pre-formation (napkin-stage)
to companies that have several employees and customers. Typically they'll invest between $100,000
to $1 million and expect three to ten times the return within five years. In exchange for the
money, they get anywhere from 30 to 60 percent of the company and you get their expertise and
connections.
So, as we watch the economy tank, what are Atlanta's angels looking for today? "The same
things we looked for yesterday," says Paparelli. "The best time to invest is when the economy is
off. You want to be in a position to have the product and business already established before the
economy moves so you can have the advantage. If you start in a robust economy you might have missed
the opportunity, and might have to compete against someone already in that position."
The Funds are Here
Angel investing, he explains, is generally not driven by economic cycles. In fact, it's a
good time to be an entrepreneur looking for angel capital. Paparelli leads a group of local angel
investors who meet regularly and recently asked them who was holding back. "Eighty percent of them
are ready to invest today," he says. "Nobody mentioned anything about the recession holding them
back. The only reason an angel would hold back is if he already has his fill of investments."
At least some of Atlanta's business community agrees. April 28 and 29 will mark the inauguralSoutheast Private Equity
Conference (SPEC), where emerging growth companies can hob-knob with national and regional
venture capitalists, fund managers and private equity investors representing $560 million in
investment capital. "The southeast is on the rebound for the early stage capital market," says
Karen Rands, SPEC director.
And the
Network of Business Angels & Investors (NBAI)
community has invested in 13 companies since 2005, according to Greg Henley, director of the Center
for Entrepreneurship at Georgia State University.
Paparelli recently did another informal survey among his angel group and asked which of four
stages of companies they prefer. The choices were:
1.
Pre-formation – These are the napkin guys, the ones who may or may not have already
quit their day jobs, and don't have any employees or customers.
2.
Start-up – The company founders with a partial product and no customers or employees.
3.
Early stage – The founders plus a product and some revenue.
4.
Later stage – A business that already has established a market presence.
Paparelli was the only angel in his group interested in the pre-formation stage, and none of
them were interested in the later stage companies. The rest of the group was evenly split between
start-ups and early stage companies.
Errors and Arrogance
Even if there's money to be had, it does actually take a little more than a well-illustrated
napkin to convince an investor to strike a deal. And mistakes are common when searching for the
right investor.
Entrepreneurs sometimes talk too much about the product or service, rather than the business
plan, says Henley. Remember, they want to invest in a great management team, and they want a solid
exit plan within five to seven years that brings them the return they want. They want to see the
business plan.
Another mistake entrepreneurs make is they hold too tightly to their equity. Entrepreneurs
over-value their business, even though they don't have any customers yet. "'It's worth $10 million
today,'" Paparelli says he hears too often. "If they're stingy they won't get funded," he says.
Some of the entrepreneurs don't want to give up more than five percent of their company,
until they make the rounds and get beaten down. "But by that time the Atlanta network has already
written them off. Then the entrepreneurs come down and no one wants to work with them," he says.
"It's really important to know what you need as an entrepreneur, and I don't mean money,"
says Paparelli. "There's plain old money, then there's smart money." Smart money can help you be
successful because the money comes with an experienced business leader.
Dumb money, he says, is taking the cash from whoever has wealth, and then trying to grow the
company alone.
If you don't want to give up 60 percent, consider this: if you have the right investor,
giving up that percent is the smartest thing you can do, says Paparelli. "You'll build a better
company and ultimately that 40 percent that you do have may be worth more than 70 percent of a
company that didn't have good advice. The bottom line of the company and your personal wealth might
be much bigger if you pick the right angel and give him a larger chunk of equity.
Ultimately, look for guys that can really help you out. It may be a match made in heaven.
Photo courtesy of ©
Tatjana Krstic |
Dreamstime.com
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