TOUCHED by an ANGEL.

HOW TO GET BLESSED WITH CAPITAL FROM THE FINANCIAL ELITE

IT BEGINS AS A LEAP OF FAITH, ONE VISIONARY'S DESIRE to create a new business. Along the way, entrepreneurs, if they are worthy, can find themselves taken under the wing of well-connected professionals who bear enough capital and experience to guide 30,000 new ventures a year to success. What else could one call these steersmen to good fortune but angels?

"We use our expertise to make decisions about the companies we invest in. Angels, in general, tend to lean toward industries they're familiar with," says Caretha Coleman, principal of the Los Altos Hills, California-based Coleman Consulting and a member of the Angels' Forum L.L.C. (www.angelsforum.com), a West Coast consortium of angel investors who specialize in start-up and early-stage ventures. "This way, we can stay on board to help bring a company to the next stage of funding," she adds. To date, the 4-year-old Angels' Forum and its co-investor, the Halo Fund, have invested more than $43 million in 50 ventures.

"When Angels' Forum invests, we invest because we believe in a new company's founders," says Coleman. "We like entrepreneurs with really big ideas, but we invest in people. We're in it for the potential home run, but we also like being involved and helping to make a difference."

REACHING HIGHER GROUND

Coleman certainly made a difference to John W. Boone. Boone, the 38-year-old founder of WineBuyer.com, carved a niche for himself in the $40-billion-plus business of wine and spirits distribution. "The current supply chain had been fragmented since Prohibition," says the visionary, who holds a bachelor's degree in management information systems. "I understood that technology was the answer and [that] I could create a software solution that made for better overall service." Using personal monies and help from angels, Boone raised Round A capital of about $1 million and started his company in April 1999. When the Website launched that June, it became the first business-to-business software platform designed to link licensed wine and spirits suppliers, wholesalers, and retailers. When Boone needed $4 million in Round B financing to expand domestically and internationally, he turned to the Angels' Forum.

"I was introduced to Caretha Coleman through a CEO network, and she became a coach and mentor to me," Boone says. "The Angels' Forum team believed in our management team and felt our people could take this venture over the hump." The Angels team engineered a strategic investment with international online portal Winepros Ltd. In May 2000, Winepros invested $2.5 million in WineBuyer.com. The Angels' Forum and its members helped raise the rest. By September 2000, WineBuyer.com had been acquired by eVineyard, a business-to-consumer wine seller. The acquisition enabled eVineyard to service both consumers and businesses; Boone has been named vice president of business services at eVineyard.

"I'm particularly interested in supporting Afro-Americans who work hard on their dreams," says Coleman. The Angels' Forum describes itself as a "culturally diverse group" that hopes its investments reflect "our commitment to diversity."

MIRACLE WORKERS 

According to the most recent figures from the Small Business Administration (SBA), there are 350,000 small companies (called gazelles) that are searching for angel investors who will fund about 30,000 of them each year. The SBA also conservatively estimates that roughly 250,000 angels invest $20 billion annually, which is about twice as much money as institutional venture capital funds invest per annum. Angels also invest in approximately 15 times as many companies as institutional venture capitalists do. The estimated average angel investment in a company is about $660,000 and the average investment by each individual angel is about $80,000, according to the SBA.

Angels invest in companies that aren't quite ready for the larger investments of venture capitalist firms. They prefer to invest in markets and technologies that are familiar to them, and typically invest during the seed or start-up stages of such ventures. Angels have patient exit horizons of five years of less. Since most angels are themselves former successful entrepreneurs, they come with a wealth of knowledge and connections, financing companies that need between $250,000 and $5 million.

GUARDIAN ANGEL 

Harmon Construction Inc. (www.harmon1.com) was a family-owned Indiana business for 16 years before angel investor William G. Mays bestowed capital and influence on the company. Started as a full-time general contracting business in 1969 by William D. Harmon, Harmon Construction Inc. was relatively small when Harmon's sons, Bill and Tom, were poised to take over the company in 1985. Mays, president of Indiana-based Mays Chemical Co. (see "BE Company of the Year," this issue) and an angel investor in about 12 ventures, had known Tom Harmon since they both worked at Cummins Engine, a leading American diesel engine maker.

"Bill Mays and I kept in touch," says Tom Harmon, now president of Harmon Construction Inc. "He has always been a type of mentor to me." Mays provided capital during 1989, which enabled the brothers to buy out the company's other shareholders and refocus its vision. In true angel fashion, Mays not only offered business advice, he also used his own position as a successful Indiana businessman to introduce the pair to his banking connections, increasing the company's access to loans and equity. "Mays was not involved in the day-to-day management of the company, but he put us in a position to have a better credit line," adds Harmon. Twelve years later, Harmon Construction is headed toward its best years ever. With gross revenue expected to exceed $10 million this year, Mays' time, patience, and influence, along with the Harmon brothers' hard work, is certainly paying off.

"Angel investing is patient capital," adds Mays. "You have to recognize that you are not going to get a quick return, but you still want a return. We are not a charity, but we do tend to be more flexible [than traditional investors]."

DIVINE INTERVENTION

Angels are individual investors writing checks from their own accounts. They can be "active" investors, serving on boards of directors, or providers of guidance--preferring to serve in less formal counseling or mentoring roles. Venture capitalists, on the other hand, use institutionally raised funds run by professionals. In general, angels take bigger risks and are willing to accept lower rewards when they are attracted by the nonfinancial characteristics of an entrepreneur's proposal. That's partly what gets them their moniker. Angels can afford the risk inherent in private investment and, at the same time, they are inclined to act, contributing time and money, based in part on their "feel" for a business or the confidence they have in the entrepreneur.

BLACK ANGELS

Wealthy blacks, like most wealthy Americans, may embrace the risk inherent in investing, but they usually put their money in less volatile places than the angel market. Blacks who have made their wealth outside of the high-tech arena, for example, may not have enough of an interest in or knowledge of the industry to pick a potential winner.

"Angels have to bring experience and resources to a company, not just money," explains Sidney S. Williams Jr., founder and principal of New York-based AXIA Partners (www.axiapartners.com), a private investment banking firm that acts as an intermediary between entrepreneurs and angels. "Besides," he adds, "investing in the stock market gives you the option of taking your money out whenever you want. When you invest as an angel, you can't go in and get your cash, and you won't see a dividend or payoff until the venture is successful." Black angels tend to network with like-minded professionals. Therefore, expect many angel groups or networks to be as diverse as the fields they specialize in.

AXIA Partners provides its services to start-up and early-stage companies because "a lot of blacks don't have the network to raise $50,000 through family and friends," says Williams.

FIELDS OF DREAMS

In 1997, Michael S. Fields created the Fields Group as a vehicle through which he could make angel investments in emerging technology companies. Fields had already found great success as a partner in NewVista Capital 1 and is still a partner at NewVista Capital 2, which raised $20 million and $52 million, respectively, in professional money, and invested in more than 25 early-stage tech companies. The Fields Group, however, has only one investor: Fields. The company is wholly financed `through Fields' own money. So far, the Fields Group has invested roughly $3 million in nine companies. But true angels never stop at investing alone. Fields also provides networking and resources. In fact, Adamation (www.adamation.com), a software designer, and three other companies funded through the Fields Group are housed in a downtown Oakland, California, building affectionately called "the accelerator." Fields owns the building. This gives him convenient one-stop access to his companies, and the tech companies get a next-door-neighbor networking advantage, as they can tap each other for resources.

So just how do you meet an angel like Fields? "I read a newspaper article on Michael Fields and cold-called him," recalls Stephan Adams, president and CEO of Adamation. At that time, Adamation was mainly a custom software developer, but it was ready to expand into commercial development. "I was just looking for mentoring and found Fields very receptive,". Adams adds.

Four years and $800,000 in angel start-up capital later, Adamation has an outstanding flagship product called personalStudio, a digital video-editing program. Adamation also closed two big deals last year. In April 2000, Hitachi partnered with Adamation as its master distributor in Japan and bundled personalStudio with all its multimedia-class machines running on the BeOS operating system for distribution here. Hewlett-Packard also had its eye on Adamation last year. In August, HP provided $9 million in funding to Adamation to help the company expand its business.

"When it comes to angel investing and early-stage investing, both carry the same strategy," says Fields, who invests in only about 5% of the entrepreneurs who approach him with ideas. "I start with the management team and look at their desire and work ethic. Do they have what it takes to make the business a success?" Fields has proven himself over and over again as a great judge of potential. Currently, the companies financed through the Fields Group are valued at $18 million, with plenty of potential for further success.

THE THREE F'S

It may not take 20 years of investment in your business to attract angels, but it will take some initial investment on your part. Angels are usually the first round of "professional" money a new business will draw, but before a venture can get to that stage, insiders say entrepreneurs must first raise money through the three F's: founder, family, and friends. Angels will insist on this, and entrepreneurs will want to show that they have made the first commitment to their new venture. Financing from the three F's measures how much entrepreneurs believe in what they are doing and how successful they have been in convincing those who know them best, their friends and family, to invest in them. In general, entrepreneurs are expected to raise the first $50,000 to $250,000 through these principals. According to PricewaterhouseCoopers Entrepreneur Resource Center (www.pwcerc.com), your major points to consider during this stage of financing include: How much equity to give to these early investors, how to keep family relationships intact if the venture fails, and what their involvement in business operations will be.

ANGELS IN YOUR OUTFIELD

Five angels invested a total of $40,000 in Henry Ford, launching Ford's auto empire in 1903. Alexander Graham Bell used angel money to found Bell Telephone way back in 1877. Apple Computer and Amazon.com are important businesses today because of angel investments.

If you are launching a new venture, unless you're already independently wealthy, you're probably going to want angels on your team. But how will you find them and once you find them, how will you get them excited about your vision? The recent dotcom boom (and subsequent bust) has caused angels to organize like never before, creating easier access for entrepreneurs.

The AngelSociety (www.angelsociety.com) was founded last year as a multimedia community designed to service the large and growing early-stage investment community. The New York-based association provides content, information, research, and networking opportunities to angel investors and new businesses. The Society, along with Bloomberg Publishing, publishes Angel Advisor magazine, hosts live events--the AngelSociety Forums--and runs an Internet service, AngelSociety Online.

"AngelAdvisor's mission is to be the preeminent source of information for seasoned and emerging angel investors," says Scott Peters, co-CEO of AngelSociety. "We will provide indepth coverage and analysis of the angel investing process and market developments."

On the national front, the SBA's Office of Advocacy has organized a coast-to-coast forum, ACE-Net, designed to expose new ventures to qualified angel investors. And, of course, there's the basic tried-and-true model of personal networks and referrals.

Industry insiders note that even during the sizzling hot days of the dotcom explosion, most new ventures reached angels through referrals. "Personal networks are a powerful tool that too many blacks undervalue, but most of our deal flow is a result of our collective business and personal relationships," says Coleman. "Business brings like-minded people together, and we need to know each other and help each other. Sometimes angel referrals can even come from venture capital firms who deem that the start-up is just not ready for venture capital funding," she adds.

ACE-NET

The SBA developed the Access to Capital Electronic Network (ACE-Net) (https:// ace-net.sr.unh.edu/pub) as a nationwide forum for small companies searching for $250,000 to $5 million in angel capital. ACE-Net is an Internet-based listing service for ventures that, for a fee of up to $450 annually, can be viewed anonymously by accredited angel investors across the nation. An accredited investor is, according to the rules of the U.S. Securities and Exchange Commission, an investor with, in most states, a net worth of $1 million or an annual income of more than $200,000 ($300,000 for a married couple) for the past two years. ACE-Net provides entrepreneurs the opportunity to post their company's information on a secure Website that angels can visit anytime, anywhere.

"Angel investors in Washington can look at a business plan from an entrepreneur in Maine using their computer and modem," says Jere Clover, former chief counsel for advocacy at the SBA. "This is indeed what ACE-Net is all about. ACE-Net has created a true national marketplace for entrepreneurs and investors." ACE-Net requires all businesses to be in full compliance with federal and state securities regulations.

There are other national online matching services such as Garage.com and DirectStockMarket. com, but neither of these is geared exclusively toward angel investors. Garage.com is tailored toward start-ups seeking $500,000 to $10 million. DirectStockMarket targets companies seeking $5 million to $20 million. ACE-Net is a good early move because, with its national scope, it exposes proposals to the largest possible pool of angels, increasing the odds of your finding one who will show interest in your venture.

National matching programs like ACE-Net, however, are not without critics. The Angel Report, published by the Community Development Venture Capital Alliance (www.cdvca.org), a New York-based business investment and development alliance, examined national matching services like ACE-Net and concluded, "The computer matching concept has proven to be a limited resource in terms of actually linking entrepreneurs with sources of capital." The CDVCA, which has a mission to bring investment capital to low-income areas and whose 80 members include 40 venture capital firms, concluded that angels favor "personal investing" and many like to "kick the tires" on a deal. The report gives computer matching services a 10% success rate and angel investor networks a higher, 40% success rate.

ANGEL NETWORKS

There currently is no definitive directory listing for the 100 or so estimated angel investor networks in the U.S. and most note no need for one. Angels tend to stay on familiar ground. Literally and figuratively, angels don't travel far. They prefer to invest close to home, typically within a day's drive from where they are based. Forty percent of all angels who made investments last year were located within 15 miles of Silicon Valley, making it truly California's land of the angels. Of the 100 angel investment networks estimated to function in the U.S., most are concentrated on the East and West coasts, industry insiders say. They all seem to follow a general format of regular monthly meetings where selected entrepreneurs are invited to make presentations to the group. This is followed by a question and answer session.

"I review an entrepreneur's business proposal and screen the applicant," says the Angels' Forum's Coleman. "If necessary, I prep them to make sure their focus is right before the other angels preview them. Once the entrepreneur goes before the full preview, they have 20 minutes to get their story across as to what they are trying to do and how they plan to accomplish it. If they fail here, they don't get a second meeting with the Angels' Forum." A longer meeting follows with more details if they pass. Interested angels then conduct due diligence and, if still interested, they negotiate a deal with the entrepreneur. Most angel networks require investors to meet securities law requirements as accredited investors and most have special provisions to keep investors with mind-sets incompatible with the group's from entering. By pooling resources, angel networks offer increased intelligence and experience and deeper pockets than any individual angel flying solo.

To find angel networks, start with the Internet and try several combinations of key words such as "angel capital," "angel investors," or "angel finance." Several choices will appear. To find angel networks specifically in your field or geographical area, check with local chambers of commerce, economic development authorities, business incubators, and local universities. Angels prefer privacy and informality, which may account for the lack of directories.

EVEN ANGELS SAY NO

With the number of available resources and organizations growing, it will only get easier to get your plan before an angel who's interested in what you will do to the marketplace. But as the Angels' Forum's Coleman warns, "All angels see more business plans than they are able to invest in. So often the first answer is no. Entrepreneurs have to have the passion and commitment to keep pushing. Some of the world's most successful people have first seen failure." To cut down on the number of times they hear no, entrepreneurs should familiarize themselves with the six main ingredients angels look for in a business plan (see sidebar "Devil in the Details"). With a plan that measures up, the only sound they'll hear from angels will be a joyful noise.

Devil In The Details

Here are the six main questions angels should expect your business plan to answer:

1 Management

How experienced and passionate is your management team? Does everyone share one vision and yet harbor the ability to change direction and heed the advice of others?

2 Product

Is your idea a prototype or a proven concept that has already shown revenue that can be scaled with additional funds, or does your business exist only in concept? Is it just a theoretical business that you think will work, or do you already have Web traffic or customers with a revenue stream?

3 Strategic alliances

Who else has bought into your vision? With what companies have you signed significant agreements to partner with either technologically or from a marketing/goodwill standpoint?

4 The Marketplace

How big is the market for your product or service? Is your potential market $200,000 or $5 billion?

5 Sustainable competitive advantage

If someone came into your market after launch with a lot more money than both you and your angel have, would your business model survive? Do you have a key technological alliance or community that is not easily duplicated?

6 Cash Flow/Cash Out Model

How much cash will you need to attract the first institutional investors? When will your cash flow be positive and what do the future round of requirements look like? Do you have a repeatable revenue stream? Who are the likely candidates that can afford to buy your business at 10 to 20 times its current valuation? Do you have any bona fide offers for your company?