These individual VC investors seem like they're from heaven, but be prepared to give up a chunk of your company for funding.
Definition or Explanation: Working with angel investors means acquiring venture capital from individual investors. These individuals look for companies that exhibit high-growth prospects, have a synergy with their own business or compete in an industry in which they have succeeded.
Appropriate For: Early-stage companies with no revenues or established companies with sales and earnings. Companies seeking equity capital from angel investors must welcome the outside ownership and perhaps be willing to relinquish some control. To successfully accommodate angel investors, a company must also be able to provide an "exit" to these investors in the form of an eventual public offering or buyout from a larger firm.
Supply: The supply of angel investors is large within a 150-mile radius of metropolitan areas. The more technology driven an area's economy, the more abundant these investors are.
Best Use: Runs the gamut, from companies developing a product to those with an established product or service for which they need additional funding to execute a marketing program. Also, angel investors are appropriate for companies that have increasing product or service sales and need additional capital to bridge the gap between the sale and the receipt of funds from the customer.
Cost: Expensive. Capital from angel investors is likely to cost no less than 10 percent of a company's equity and, for early-stage companies, perhaps more than 50 percent. In addition, many angel investors charge a management fee in the form of a monthly retainer.
Ease of Acquisition: Angels are easy to find but sometimes difficult to negotiate with because they usually do not invest in concert and may demand different terms.
Range of Funds Typically Available: $300,000 to $5 million.
Angel investors are at once difficult and easy to find. The situation is analogous to searching for gold. Generally, it's difficult to find, but once you hit a vein...all your hard work pays off in a big way.
Here are the places angels might be hiding:
•Universities: According to Bob Tosterud, Freeman Chair for Entrepreneurial Studies at the University of South Dakota, angel investors tend to hover near university programs because of the high level of new business activity they generate. He advises that if you are looking for money, call the nearest university that has an entrepreneurship program, and make an appointment to speak with the person who runs it. Generally, he says, such people can point you in the direction of angels.
•Business incubators: According to the National Business Incubation Association (NBIA), there are about 1,000 business incubators in North America. At first blush, incubators appear to be the mere bricks and mortar facilities that offer entrepreneurs reasonable rents, access to shared services, exposure to professional assistance and an atmosphere of entrepreneurial energy. But according to NBIA president and CEO Dinah Adkins, many business incubators offer formal or informal access to angel investors.
•Venture capital clubs: The tremendous wealth created through the commercialization of technology, as well as the robust stock market of the 1990s, have resulted in a large number of angel investors who have begun to formalize their activities into groups or clubs. These clubs actively look for deals to invest in and their members want to hear from entrepreneurs looking for capital.
•Angel confederacies: Some angels, shunning the formality of a venture capital club, band together in informal groups that share information and deals. Members of the group often invest independently or join together to fund a company. So-called confederacies are not easy to find, but once you locate one member, you gain access to them all, a number that could top 50 investors.
Here are 10 action steps you can take to find angel investors in your area:
1. Call your chamber of commerce and ask if it hosts a venture capital group. Many such groups have a chamber affiliation.
2. Call a Small Business Development Centernear you and ask the executive director if he or she knows of any angel investor groups. Ask the SBA if you don't know where an SBDC is.
3. Ask your accountant. If your accountant doesn't know, call a Big Four Accounting Firm and ask for the partner who handles entrepreneurial services. Ask him or her to point you in the right direction.
4. Ask your attorney. Lawyers always know who has money.
5. Call a professional venture capitalist and ask if he or she is aware of an angel investor group.
6. Contact a regional or state economic development agency and ask if anyone there knows of an angel investor group.
7. Call the editor of a local business publication and ask if he or she knows of any groups. These professionals often write about such activity.
8. Look at the "Principle Shareholders" section of initial public offerings (IPO) prospectuses for companies in your area. This will tell you who has cashed out big.
9. Call the executive director of a trade association you belong to. Ask if there are any investors who specialize in your industry.
10. Ask your banker. If you do business at a small bank, ask the president of the institution. If yours is a larger commercial bank, ask your lender. If you do not have a lender, ask for a lender who works with loans of $1 million or less. A good small-business banker knows of such groups because companies that have received an equity investment are good candidates for a loan.
Working With Your Angel Investors
Make sure your angel investors won't hold your business back when it's time to graduate to larger investors.
By David Worrell, Entrepreneur Magazine, Nov. 2005
These days, investors at medical services company Inoveonin Oklahoma City are a pretty happy lot. The company recently celebrated its 40,000th customer and revenue has passed the $1 million mark, so investors have much to celebrate. But Inoveon co-founder Dr. Lloyd Hildebrand will tell you that bringing together three founders, seven angel investors and five VCs was not always a party.
When Hildebrand, 48, and his partners decided to commercialize the technology they had been working on at the University of Oklahoma, they started the way most entrepreneurs do--by digging into personal savings and asking friends and family for help. In total, the three founders and seven outside investors put together about $250,000 in seed capital.
From the outset, however, Hildebrand and his team knew that the angel investors' capital wouldn't be enough to get the company off the ground. If Inoveon's technology to diagnose eye disease in diabetic patients was ever to see the light of day, they'd need millions more. Still, they couldn't afford to worry about that in the beginning.
"At that time, we needed dollars to demonstrate the concept would work," Hildebrand says. "Money was more important than smart money at the beginning. We needed capital to stay alive."
That's a typical--and potentially dangerous--predicament for a young company, says Jonathan Karis, partner and chairman of the Business Practice Group at Boston law firm Nixon Peabody. Karis advises entrepreneurs to consider the time when their company may need more money than the angels can provide. Too many unsophisticated or inexperienced angel investors create management headaches and get in the way of raising future capital from VCs.
On Whose Terms?
The real problem for most angel investors comes when the business has outgrown the angels' ability to contribute growth capital. Karis notes that venture capital may come with terms and conditions that significantly devalue or dilute the original shareholders' value. A VC firm may even insist on renegotiating the angels' original investment terms.
Such was the case at Inoveon. Hildebrand says that both of the subsequent rounds of venture capital that Inoveon received were at a valuation substantially below what the angels had negotiated. So the new VC investors actually paid less for their stock than the original angel investors, and as a consequence, the ownership and control held by the angels was drastically reduced. Investors call this a down round, referring to the falling valuation. Of course, down also describes the mood of the early investors. "I don't think anyone was happy about it," says Hildebrand, "but we all understood the realities of the marketplace and of building a company."
Karis says that it could have been much worse. He's seen angel investors refuse to allow VC investment even though their refusal cripples the business. To prevent such a predicament, Karis advises entrepreneurs to look for either one very experienced angel investor or an organized angel club to take the lead role in the initial investment.
As an additional precaution, every company owner should anticipate future funding needs--including possible down rounds--and limit early investors' ability to torpedo negotiations for subsequent funding. "Position your angels legally so you facilitate venture funding instead of hindering it," Karis suggests. "Traditionally, VCs will require approvals of next funding rounds, so angels may ask for the same thing. But I don't want my angels to have too much control over the next round."
By anticipating a funding shift, you can set reasonable investor expectations, backed by the legal framework that gives your company the flexibility to grow. "If you're ready for a $10 million [VC] investment, then the angels just need to come along for the ride," says Karis.
Part of the dilemma is that setting the valuation (i.e., the stock price) for an early stage company is more of an art than a science. As a result, angel investors are more likely to worry about the rights they have as shareholders than about price. Later, when the VCs get involved, valuation is more obvious and often well below the lofty price projected by the early business plan.
As much as they need each other, VCs and angel investors often butt heads over issues of valuation and control. The key to defusing this situation is to set out a fair and flexible agreement in writing before accepting the angel's capital. The agreement should specifically prohibit early investors from blocking subsequent funding rounds under certain conditions. "It's a hard negotiation," says Karis. "But if you build flexibility in when you go to them, that's when you have leverage with them. Once you have their money, it's more difficult."
Even in the best of cases, Karis compares managing investors to herding cats, but a reasonable agreement upfront can make the task less painful.
The Fine Art of Meeting With an Angel Investor
Practical advice on when and how to pitch private investors for your business
By Asheesh Advani, June 06, 2005
When it comes to raising money for your startup, don't expect any miracles: Angels don't descend from heaven. In most cases, angel investors will already know you or be introduced by a mutual friend. This is partly because they need to have confidence and trust in you to take a risk on you and your business, but also because they simply like hanging out with entrepreneurs. Angel investors like being mentors, and they typically like to experience the entrepreneurial life vicariously.
Why do they want to hang out with you? Angel investors learn about you by being as interested in you personally as they are in what your business does or sells. If they don't already know you--that is, they're neither your friends nor members of your family--they'll ask around about you behind your back. They'll see what kind of car you drive and if and where you take vacations. Their impression of you, as well as your business experience and your management skills, are all critical to their decision to invest. They'll also talk to mutual associates to get the inside skinny on you--if people they know and trust say you're a genius but lousy with money (or something equally frank), they're likely to listen closely.
And angels are interested not just in you; they also want to know about your team. They want to get to know the people working with you and see that you've gathered an experienced and innovative management team to help you grow your business.
Scheduling a Meeting
You'll need to weigh three factors to help you decide when to schedule the meeting where you'll ask the angel for the investment:
1. State of your relationship with the angel investor. The right time to ask for money is when your relationship is comfortable and trusting and when you sense the investor will be open to the request.
If the investor is a friend or family member, you should have a good sense of their personal life. For example, if there are any big life events like a move, a marriage or a new baby coming up, it's probably not the best time to ask for money. If the investor is unrelated, you'll be best served to make contact and have at least two or three social interactions with him or her before asking for money--unless of course you're lucky enough to have a strong introduction from a close friend of the investor--preferably one who's already invested in your business--that is specifically intended to help you schedule a meeting to ask for money.
In each case, the investor should know you have a business plan and be curious to hear more before you suggest a meeting about capital-raising.
2. Cash needs of your business. A useful calculator for estimating your company's cash needs is available on our site here. It will take, at a minimum, many months to close on your round of fundraising, so you'll need to understand your cash flow well enough to plan several months in advance for how much you'll need and when.
3. Time it'll take to close the deal. It takes time to raise money from relatives, friends and angel investors--just like it takes time to raise money from venture capitalists. Entrepreneurs expect it to take six to 12 months to close a round of venture capital. For raising money from relatives, friends and angels, it could take as little as three months to close a round from five to six investors. For raising a larger round from 10 to 15 investors, it could easily take well over 6 months.
Why does it take time? Because you're not just trying to raise money for your business. You're also trying to run your company. And the investors have other things going on as well. Scheduling meetings, communicating, coordinating schedules, drafting documents--all these things take time. You might be able to impose closing dates on VC investors who are investing out of fear of losing the deal, but imposing deadlines on angel investors is notoriously difficult.
Goals for Your Meeting
You have two goals for your "money raising" meeting with an angel: First, you want to share your business idea, and second, you want to achieve a nonbinding agreement, verbal or written, to invest. If you can't end with an agreement to invest, end the meeting with a plan to follow up.
Goal #1: Communicate your business idea. When you ask for equity capital, you really must have an articulate business plan in place for two reasons. First, you need to be able to answer certain important questions about your idea. One popular one is, "When will you make a profit?" The answer to this should be in the cash flow projections of your business plan.
Second, a smart equity investor will nearly always ask to see a copy of your business plan. My advice is, unless they ask for it in advance, don't bring your full plan to the meeting. When they ask about it at the meeting, you can provide them with a plan summary and offer to mail the complete plan to them afterwards. There are two reasons for this. If you have the full plan on hand, you may get bogged down in the details related to the presentation of the plan or some information within it. Also, it's excellent fundraising practice to have a reason to contact the investor after the meeting.
In addition to your business plan, you'll be talking about your idea in general. Here are the three items that, in my experience, you'll need to know for certain before you go into a meeting with a potential investor:
•What it takes to get to profitability. Investors will want to see that you've "crunched the numbers" and made a plan for success.
•What skills you're lacking and which types of people and skill sets you'll need to have. Good leaders have the confidence to surround themselves with smart people who together make a great team. Show your investor that you know this and have a plan in place to bring on board the people needed to make your business a success.
•How your personal finances relate to those of the business. Investors don't want to hear that you're starting a business so you can spend more time at home with your kids. They don't want to see you driving around in a luxury car or dropping cash like it's going out of style. They want to know you'll be the one sweeping the floors after everyone else goes home at night. They want to know you're willing to sacrifice--to scrimp and save--to make the business succeed. They know it's hard work to create and run a successful business, and they expect you to do what it takes to make them a lot of money.
Talking to your equity investors can be nerve-wracking. Although the benefit of having a relationship is that you and your investor already have a certain level of trust established, you should still choose your words carefully. In addition to the tips I offered in my previous article on the kitchen table pitch, you should also avoid saying the following to your investor:
•That you have big plans for the future. Big plans--for example, to turn your startup chocolate pretzel store into the next big franchise--may appear vague and overly ambitious. Your investor expects you to be a visionary, but also to achieve the short term financial projections that will earn both of you a lot of money.
•Anything that appears cagey or dishonest. Honesty is the most important value investors can find in an entrepreneur, and your investor will be trying to assess your degree of honesty from day one. Avoid the temptation to puff up your projected profits or your colleagues' resumes beyond the bounds of reality.
Goal#2: Get to "yes." The goal of your meeting with the angel should be to reach a verbal agreement to invest. In the case of equity investing, because the deal will be more complex than a loan, you can approach this in two ways: with a handshake or with a "letter of intent."
With most family and friend investors, you can proceed from a nonbinding agreement, such as a handshake, straight to a legally binding agreement. But it's rare for a deal to come up and close in the same meeting, so don't expect to ask for and receive the money in one sitting. Aim to get agreement on a range--such as "I could do $25,000 to $50,000"--and that you'll send the paperwork. If you've gotten this far, you're in great shape. All that's left is to follow up by drafting and sending the agreement.
For unrelated angel investors, especially those who are notoriously difficult to pin down, aim to get the investor to sign a letter of intent (LOI) at the meeting. Although the letter will be informal and nonbinding, it's a great way to get the investor to agree to the idea of making the investment. Follow up promptly with the legally binding stock purchase agreement. The LOI is a tool to get you a commitment from an investor at the moment when he or she is most excited about the business. A signed LOI also allows you to nudge other investors by letting them know you already have money committed.
Asheesh Advani is Entrepreneur.com's "Startup Financing" columnistand president of CircleLending, a loan administration company that facilitates loans among friends, relatives and business associates. Get a copy of Circle Lending's free Small Business Financing Guidefor startups.
Now called active capital, the former ACE-Net website is completely revamped and ready to help match companies with angel capital.
By David Worrell, Entrepreneur Magazine,March 2005
Government and small business are not always the best of friends, but once in a great while, the two manage to collaborate in a way that opens new doors of opportunity. One shining example of a great program born from the government is ACE-Net, which helps small businesses find what they otherwise could not easily find on their own.
In fact, ACE-Net--the Angel Capital Electronic Network--is one of the best places for entrepreneurs to start their search for angel capital. Since its launch in 1995, ACE-Net has helped entrepreneurs raise over $100 million.
ACE-Net, however, had its share of growing pains over the past 10 years. After the SBA gave up its central role in the organization in 2000, the ACE-Net website seemed to be more or less abandoned and neglected.
Neglected, that is, until early 2004, when the directors of ACE-Net asked Phil Borden to take the helm as CEO. Borden, a former UCLA professor, serial entrepreneur and small-business finance expert, has since breathed new life into the online entrepreneur equity-matching service with a grand vision and a host of new benefits for entrepreneurs.
A Brand-New Brand
The new and improved ACE-Net bears a new name, Active Capital, and a new URL. Any entrepreneur seeking equity partners should consider stopping by.
Ironically, Active Capital's primary advantage stems from a "No-Action Letter" from the SEC. This document essentially allows Active Capital to operate an interstate matching service for entrepreneurs and investors, so long as they stay within some very specific guidelines.
"The SEC says that the actual operations must take place in either a university or a nonprofit corporation," says Borden. "What they don't want is a bunch of consultants running the show."
By keeping the operations within a university or a nonprofit entity, the SEC hopes to avoid the potential for fraud and deception. While brokers and other consultants typically provide value by being in the middle of a transaction, Active Capital does exactly the opposite: it provides only direct contact between entrepreneurs and accredited investors, thus avoiding any unfair influence over either party.
"The investor has a safe harbor because all the statements made about the company come from the entrepreneur," says Borden. "That's important because it makes the deal fair, and [only] between the entrepreneur and the investor. We, as the middlemen, stay out of the loop."
Borden compares the new Active Capital to a dating service. "We make no comments about your warts or your beauty--we simply pass along the information," he quips. By making the process direct and free from influence, Active Capital accomplishes something else--something even more important to entrepreneurs: It eliminates the need to register the equity offering with state regulators. This is a critical benefit to entrepreneurs because state regulators have just as much authority over funding transactions as the SEC. The online registration process exempts you from having to register separately with each state.
Legislative compliance, especially multistate compliance, says Borden, is one of the most elusive aspects of raising money. "People aren't trying to avoid the law; they just don't know it. It's securities law, and it's complicated."
Entrepreneurs who solicit investors outside their circle of friends, or outside their own state, can run afoul of state "blue sky" laws. Active Capital, however, allows entrepreneurs to promote their opportunities to and raise money from investors in almost any state. "Normally, you'd have to register with state regulators in each state in which you raise money. You can spend $10,000 to $50,000 in each state to register," Borden says. "But Active Capital gets you around all that."
This seemingly impossible task is possible because one of the organization's original accomplishments was harmonizing multiple state regu-lations, creating what is now called the "model accredited investor exemption." According to Borden, 40 states now accept this definition of accredited investors. And since Active Capital accepts only accredited investors, entrepreneurs can reach out to investors almost anywhere in the country with relative impunity. "Now," says Borden, "if you live in Kansas City, you don't have to worry about whether your investor lives in Kansas or Missouri."
Behind the Scenes
When he's not worried about the vagaries of legal compliance, Borden is busy building alliances and support for Active Capital from business leaders across the country. He's assembled a strong board of directors, including members such as Entrepreneur magazine's own editorial director, Rieva Lesonsky, as well as well-known venture capitalists Amy Millman of Springboard Enterprises and Don Jacobs of Consortium Innovation Centers.
All this ought to be enough to drive entrepreneurs to the Active Capital website in droves. For those who need more convincing, Borden says there are other offerings, including news feeds from Entrepreneur and other small-business sources, and video-based tutorials on raising capital and growing businesses.
"We're in the midst of producing 15-minute videos specifically on how to prepare a business for angel funding," says Borden. "If they want to go through the whole course of 40 videos, we'll certify them and guarantee them that an angel will look at their plan."
One last tool available online is an analytic tool that enables entrepreneurs to see what kinds of SEC exemptions they qualify for according to several factors, including their state, growth stage, and rate and exit plans. "We're providing an analytic tool so people know what the regulations are in each state. You'll come on and answer some questions about your opportunity, and depending on what kind of capital you're looking for, we'll be able to tell you what your options are for raising money in your region," says Borden.
The reborn Active Capital is still in its infancy. Having replaced the original ACE-Net website just a few months ago, the new site will continue to build on Borden's vision. Says Borden, "We have a development plan for the website that will continue to increase in sophistication in the coming years."
David Worrell is an investment banker and author of the e-book Finding Funding.
Not So Fast!
Seeking an investor? Slow down and take five steps to protect your company from making a bad choice.
By David Worrell, September 2003
Bob Shallenberger knows time is money. He talks fast and makes decisions quickly. By all accounts, Shallenberger's need for speed has made him a highly successful entrepreneur. But last year, when his home-building business needed an investor, Shallenberger's rapid-fire approach to decision-making almost burned the house down.
Being in real estate, Shallenberger finds that investors are not shy about offering him their money. Says Shallenberger, "Having an investment that returns 30 percent annually and is backed by real property, it's pretty easy to get people interested."
Shallenberger's company, Highland Homes of Saint Louis, never needed an investor until, early this year, with two $500,000 homes already under construction, his banker pulled the plug. "When the bank said we were already overextended, we decided to take on an investor," he recalls.
With hardly a second thought, Shallenberger, 33, reached out to a casual acquaintance who had previously indicated an interest in investing. Immediately, it seemed like a good fit, so Shallenberger closed the deal. "We shook hands and next met at the title company," says Shallenberger. "But did we have a written agreement? No. Did we research his background? No. We just knew he was a partner at a respected law firm."
Shallenberger soon regretted shooting from the hip. He quickly discovered that the investor expected to be consulted on everything from the exterior landscaping to the interior paint color. As a result, the home that was supposed to take five months to build instead took 10.
In hindsight, if Shallenberger had slowed down to better evaluate his investor, he might have seen the warning signs before it was too late. Before you jump the gun with an investor, work through the following five steps:
1. Know the investor's personality. According to attorney Marc Morgenstern, who advises both investors and entrepreneurs in private equity deals at law firm Kahn Kleinman in Cleveland, there are some people an entrepreneur should simply avoid. "For example, I try to never let a client take money from lawyers; they're the worst," he says, without a hint of irony.
More generally, different kinds of investors have different reasons to invest. Shallenberger thought his investor simply wanted a good return on his money. In fact, it was probably more about the status of building expensive homes, he says.
To glean personality clues, Morgenstern advises clients to listen to the questions investors ask. An obsession with operational detail is often a sign an investor will worm his way into day-to-day company management. If you need additional management help, that may be to your advantage. But it can easily spiral into a case of too many chefs spoiling the stew.
2. Do background research. No matter how badly you need investment money, there's no reason to get it from a deadbeat or felon. Internet-based reference search companies, such as ChoicePointOnline.com, LocatePLUS.com Inc. and USSEARCH.com Inc., provide quick and easy ways to know if your investor has any skeletons in the closet.
Reference search services access databases of business licenses, criminal records, bankruptcies, real property transactions, civil court judgments, even utility bills. A basic search through LocatePLUS.com costs less than $8 but could save you thousands in the end.
"Within the search results, look for inconsistencies," advises Jon Latorella, president of Beverly, Massachusetts-based LocatePLUS.com Inc. "A lot of times, the absence of data is more important than the info itself. If very little is available on a person, it could be that they simply pay cash for everything-or it could be more insidious, like their whole personality is fabricated." Likewise, multiple occurrences of different names, or different spellings of the same name, may indicate previous fraud.
Morgenstern also uses background reports to look for someone involved in multiple lawsuits. "People who have been in litigation tend to end up in litigation," he warns. "They could be someone who seeks litigation or simply someone who does not know how to resolve conflict. Either way, avoid those people."
3. Get help. Taking on an investor is like getting married: It's an emotion-filled decision with long-term consequences. That's why consultant Mike O'Malley, who provides due diligence services through his Chicago company, The O'Malley Group, recommends getting an outsider or a consultant to look over the deal. "A consultant has no stake in the deal and can operate at a level above any particular self-interest," he says. "We can ask the tough questions that other people are unwilling to ask because it makes them uncomfortable."
If a paid consultant isn't in the budget, look within your own network for a person whose judgment you trust. Ask them to look at both the investor and the players in your company to assess the fit. "The whole system has to work together," says O'Malley.
4. Set expectations. Perhaps the most overlooked aspect of taking on an investor is setting expectations. Even when a formal contract or subscription agreement exists, it rarely addresses issues like mentoring and management. Do you expect your investor to help manage the business or to keep his distance? Let him know in advance. Morgenstern puts it succinctly: "An expectation unarticulated is a disappointment guaranteed."
One key expectation is reporting: How much are you obligated to tell the investor about your finances and operations? "Most investors will ask for monthly financial statements," says attorney Beth Wilson of business law firm Shaw Pittman in Los Angeles, "but there could also be some requirements that should give you pause, either in terms of the frequency or relevance." Wilson advises entrepreneurs to be sure that onerous reporting requirements don't distract them from the job of running the business.
5. Tackle problems quickly. If there's one area that deserves rapid action, it's dealing with a potential problem investor. At the first sign of things going awry, begin a clear and professional dialog.
"These conversations are hard because they're confrontational," says Morgenstern. "But the investor is a permanent part of your life, and it's not acceptable to have a bad relationship."
If you explain to an investor that his actions are counterproductive, you may not only change his behavior but also win his respect. If you are less fortunate, you will end up with an angry investor-but you may save the company in the meantime.
Bob Shallenberger is still waiting to sell the home he built with his first financial investor but insists he has already profited from the experience. By having worked with a problem investor, he says, he now knows how to recognize an excellent one. "Just because you get one lemon doesn't mean you'll never buy another car," he laughs.
Shallenberger continues to accept new investors for his real estate dealings, but these days, he looks before he leaps. He finds reputable investors he can work with, and he clearly articulates both his obligations and his expectations through a written contract. Says Shallenberger, "We'll never again be forced to make a bad decision because we weren't prepared."
David Worrell is the author of the e-book Finding Funding, available at www.dworrell.com. Contact him at firstname.lastname@example.org.
Originally published in the September 2003 issue of Entrepreneur Magazine
Do You Believe in Angels?
Angel investors--and their money--are out there. Learn to catch one.
By Nichole L. Torres, Entrepreneur's StartUps, February 2003
Getting angel capital for your business was never all that easy. But today, post-dotcom-crash, is there any angel money to be had? In expert circles, opinions differ a bit.
"If you were to characterize early-stage [angel] investing as an intersection, there isn't a red stop light--there's a blinking yellow caution light," says Brian E. Hill, co-author with Dee Power of Attracting Capital From Angels (Wiley & Sons) and co-founder of Profit Dynamics Inc., an investment consultancy in Fountain Hills, Arizona. Hill notes that the trend of late is for entrepreneurs to do a lot of old-fashioned bootstrapping-spending their own cash and showing a bit of revenue to attract angels. Picking the right angel investor for your particular company is vital, so do your research beforehand. And, says Hill, start building your network of investors before you actually need the money, because it'll take time.
To get some of the estimated $30 billion a year in angel money out there, you need to be armed with the hard truth: "It's more difficult than it's ever been," says Don LeBeau, CEO and chairman of Angel Legacy LLC, a company that matches entrepreneurs to angel investors.
Still, notes Angel Legacy founder Joe Milam, "There's a growing level of interest on the part of investors." The baby boomers are the ones with all the cash to invest, and they're looking for businesses that benefit society--something the investors care about particularly. If your business benefits the environment or betters the world in some way, boomer angels could be a match for you.
Key things to remember as you're hunting for angels: Put together a good management team while marketing yourself to the right angel (one who shares an affinity for your service or product offering). Present your business idea in clear, simple language (no tech jargon), and have a trusted advisor go over your business plan before you send it out to angels to eliminate any potential issues or problems. Though these tips won't guarantee that you'll find money, they can definitely help. Bottom line: It's hard, but still very possible to get blessed by an angel.
Originally published in the February 2003 issue of Entrepreneur's StartUps
Our Little Angels
Angel investors haven't left us; they're just scaling back their operations.
By David Worrell, Entrepreneur Magazine - January 2003
John Garcia was in the right place at the right time. It was 1982 when he sold his surgical supply company to Baxter Healthcare and started looking for investment opportunities. It wasn't long before he found several small, private companies looking for financial help--including a little-known retail concept called Mail Boxes Etc.
Garcia's investments eventually returned several times his money, catapulting him into angel investing. Now, at 45, he makes a full-time job of connecting businesses with angel capital.
Garcia, founder of Angel Strategies in Tustin, California, has seen the nature of angel investing change. "There was a time when we all believed in 100 times returns. But most angels today would be happy with 10 times--and they'll settle for 3 to 5 times."
Tarby Bryant, founder of The Gathering of Angels in Santa Fe, New Mexico, concurs. "Today, angels are looking for 40 to 50 percent internal rate of return." That translates to about 4 times their investment over three years.
It's no mystery why angels have lowered their expectations. During the heyday of the public markets, angel investors were able to cash out when a company went public. The public was paying big bucks for small-company stock, and that unlocked huge gains for angel investors. But today's successful small business is more often acquired by a larger company--at a price that is sometimes below average because of overall economic conditions.
The decline of the IPO market has brought another significant change to angel investing. Rather than count on any kind of investment liquidity, many of today's angels are looking for something almost unheard of in the past: dividends. "Angels may be willing to forego higher return if they can get some part of the revenue stream on the back end," according to Garcia.
Today's savvy investor simply has more conservative expectations. Unfortunately for the entrepreneur, lower expected returns are accompanied by lower initial valuations. Just as all boats rose with the IPO tide, all boats fall as that tide recedes.
In fact, valuations of private companies have fallen right along with those of public companies. Entrepreneurs won't get top dollar for their private stock, as Garcia points out, when public stocks like Microsoft and Oracle are trading at 30 to 50 percent below their highs.
Tightening the Belt
Falling public exchanges have a double impact on companies seeking financing--not only devaluing private stock but also wiping out vast amounts of angel capital. Garcia estimates Angel Strategies investors lost an average of 50 to 60 percent of their net worth during the declines of 2001 and 2002.
When private investors see their portfolios shrink, they become more conservative. These days, money that might have gone into early-stage, private investments is headed to safer harbors like real estate, CDs and mutual funds.
As investors lick their wounds, offer them less risk and more reward. "The new ideal," says Garcia, "is to be profitable in year one--and by year two, to have excess profits for reinvestment."
Businesses that can show strong sales growth, share profits or offer creative exit strategies will have better chances with angel investors. Today, entrepreneurs who ignore investors' demands for strong sales and profits do so at their own peril.
The Good News
Despite being somewhat pickier in their deal-making, angels are giving entrepreneurs reason to hope.
As venture capital investments decline (see "Dollar Signs" from December 2002), many angels are aggressively seeking to fill the gap. "Fewer VC dollars means better deals for angels," explains Bryant, who sees more and more individual investors stepping up to the plate.
The level of activity is also on the rise within Garcia's Angel Strategies group. In 2002, the group closed more deals than in the previous two years combined. The success of such groups as The Gathering of Angels and Angel Strategies, which bring individual investors together to find, evaluate and nurture growing companies, is an encouraging sign. Similar groups are popping up in almost every city. If your banker or lawyer can't point you toward one, contact a local VC or SBA office.
Entrepreneurs have a better chance of finding interested angels when they're presenting to one of these groups. Further, when a deal is done, companies also stand to benefit from the collective expertise that such organizations offer.
Devil's in the Details
Any business that is looking for financing these days should not overlook the huge opportunity that angel investors present. Whether individually or in groups, angels are an important source of funds for entrepreneurs--perhaps even more so now that VCs have pulled in their horns.
Be prepared, however, for an angel to take a long, hard look at your business and financial plans. Few investors will be fooled by a promise of a quick IPO, and many might prefer a reasonable, steady return on their capital. That, plus a realistic valuation and a reasonable assurance of return, will go a long way toward attracting today's individual investor.
What Investors Really Want
Forget what you think you know about getting start-up or expansion capital. Here's what investors are looking for.
By Cliff Ennico, June 03, 2002
They're Investing in You
I'm feeling a lot like Sigmund Freud these days. You may recall that people often asked the famous psychiatrist "What does the opposite sex really want?" Since the bursting of the high-tech bubble, people around the country frequently ask me "What do investors really want?"
Let's face a hard fact. Many of the companies that were looking to raise money in the late 1990s were not real businesses. They were ideas--often brilliant ones, but they were not companies. They had not developed, tested or launched their initial product or service. They had no clue (although some had done some market research) whether the consumer would buy what they were offering for sale. They had no revenue or cash flow from operations. And profits? As they say in the Bronx, "Fuhgeddabouddit!"
Financing expert David Newton can help you with any other questions you have about getting capital.
Wyn Lydecker, a business development consultant based in Darien, Connecticut, helps early-stage companies craft their business plans to attract outside capital. I asked him to share some insights about what's working and not working these days when it comes to attracting outside capital. "We are finding that angels and venture capitalists are only looking seriously at businesses they can understand," says Lydecker. "Investors tend to invest in what they know. They don't have the time or inclination to learn a new industry."
Lydecker reminds business owners to do their homework before asking for money. "Target your pitches to investors who are interested in your business category. If you have invented a new pump for boats, for instance, try to find investors who are yachtsmen or sport fishermen."
Investors are not really interested in how your products work. Believe it or not, most are willing to trust you to work the bugs out. What they want to see, preferably at the beginning of your presentation, is an in-depth knowledge of your marketplace, and how your products and services serve that marketplace. What problems do your products and services solve, and why will people part with their hard-earned money to buy your solution?
Next in importance is the strength of your management team. "Investors more than ever want to invest in people," says Lydecker. "And they want to invest in people with a track record. If you are starting a fast food restaurant franchise, does your management team have experience in both fast food and franchising?"
Gaps in the management team are a sure sign that a company is not "ready for prime time." I once performed due diligence on a company that was launching a "community" Web site for stay-at-home mothers. The founders were all former top consumer marketing executives with Rolodexes full of super business contacts. There was only one problem--and it was a big one--the company, which planned to target mothers, had no women on its management team. The company is not around today.
Next, never, ever tell a potential investor you have "no competition." "I wince whenever a client tells me [that]," says Lydecker. "Every business has competition. You have to be honest with yourself about who your competitors are, the likelihood that you will beat them in a fair fight, and the strategies you will use in confronting them."
What about financial projections? "They should be simple and straightforward," he advises. "You should make your projections on a cash basis, and be sure that you've really thought through your assumptions. Investors want to know where your revenue, cost and income projections have come from and how realistic they are."
If you are not sure about this, present your investors with three separate projections under the headings "best case," "worst case" and "our expectations," preferably side by side in columns so the investor can make an easy comparison.
When selling your company to investors, it's helpful to remember the "three Cs" of successful business plans:
1. Compelling idea: The appeal of your products and services to the marketplace should be direct, obvious and immediate; if an investor has to ask you why people will buy your stuff, the ballgame's over.
2. Competent management: Do your people thoroughly understand the technology and, more important, the market?
3. Cash flow: If you are not making enough money to pay your electric bill each month, don't expect your investors to pay it. It may take longer to generate profits, but revenue (the number of things you sell multiplied by the price per thing) should be sufficient to cover your basic operating expenses and pay you some sort of salary within your first 12 to 18 months in business. Ideally, you should not be talking to investors (other than your partners, friends and family members) until you have reached this point. In business, nothing says "success" better than piles of cash rolling through the door.
Cliff Ennico is host of the PBS television series MoneyHunt and a leading expert on managing growing companies. His advice for small businesses regularly appears on the "Protecting Your Business" channel on the Small Business Television Network at www.sbtv.com. E-mail him at email@example.com.
Playing an Angel
Even when the financial arena is dealing nothing but bum hands, angel investors can be the wild card that puts you on top.
By Nichole L. Torres, Entrepreneur Magazine - May 2002
Networking Your Way Into (Investment) Heaven
Raising money ranks right up there with root canals and tax audits as one of those not-so-fun, yet necessary, activities in life. And the dotcom bust, tumultuous money markets and slowing economy certainly haven't made the money hunt any easier.
But that's the bad news. The good news? "There's definitely money out there, and companies that have good business models and combine that with great management teams can certainly get capital today, from both angels and VCs," says Brian Hill, co-author of Attracting Capital From Angels.
The tough part, of course, is getting the money. But experts offer a few tips to help ensure success. First, you have to network with everyone you know, such as family, friends, your lawyer, the neighborhood grocer--anybody who will listen to you talk about your idea. You'll also need to perfect your elevator pitch; two minutes is probably the most time you'll initially get with an angel.
And the companies with the best chance of obtaining angel funding in 2002 are those that already have a product or service on the market or are very near marketability. Those whose companies have made it to the break-even point have an even better shot at growth capital, say experts. So if you're in the early stages of a start-up, you're probably not going to get angel financing just yet--you need to be a bit further along.
Why? Investors are looking for entrepreneurs who have gone back to the bootstrapping way of starting a business--entrepreneurs who have used their own seed money, created a business plan, acquired customers and set up distribution channels. "[Many entrepreneurs] are thinking about doing those things, but they want to get someone else's money to go try it and see if it works," says Cal Simmons, co-author of Every Business Needs an Angel. "I would much rather talk to an entrepreneur who has already put his money and his effort into proving the concept. And I think most angels I know feel the same way right now."
These are the kinds of steps Tori Stuart took when she looked for angels to fund Zoe Foods, her Newton, Massachusetts, natural foods company. She networked with everyone, getting the buzz out on the street about Zoe Flax & Soy Granola, her natural remedy for the symptoms of menopause. It also helped to have a product that already had enthusiastic customers supporting it. "The challenge in raising money is communicating [about our company and product] because we're in the natural foods sector," says Stuart, 36. "[Not all] investors are natural foods consumers." Getting them to believe in a product they weren't familiar with presented its own set of unique challenges.
But starting to network early--and forging connections long before she even needed capital--is ultimately what helped Stuart and her management team raise $1.2 million even at the height of 2001's economic difficulties. "Start months before you need to," says Stuart. "And to some extent, you have to put the economy out of your mind."
So the bottom line in the angel funding arena these days is simple--it's tougher to get capital, yes, but there is still money to be had out there. "Angels by nature tend to be optimistic," says Simmons, "but they just want more assurances today than they did a few years ago. That's OK--I think [it] helps everybody. But there are still plenty of angels out there looking for deals to invest in. So entrepreneurs who do their homework and prepare--they can get financed."
Send Me an Angel
With new angel funds and networks popping up nationwide, that shouldn't be too hard to do.
By Cynthia E. Griffin
Angel Funds and Networks
When it comes to business financing, the past two years have had a Wild West feel to them. There were companies funded by venture capitalists and taken public in a matter of months, firms whose valuations soared heavenward at light speed, and entrepreneurs in their twenties cashing in on ventures they founded in their dorm rooms.
Then reality hit. Venture capitalists slammed on the brakes, and banks snapped their purse strings shut. Now hundreds of young companies and would-be entrepreneurs are left with start-up and expansion hunger pangs and no clear idea how to satisfy them.
While firms that are more established can turn to the $5 trillion in nonventure private equity available from brokers/dealers, private bankers and qualified institutional buyers, start-ups—especially those not located in the traditional investment hotbeds—will likely need to fall back on an old standby: the $30 billion angel investor arena.
The good news is, today's angel investors are much easier to find than their predecessors, because a growing number of them have created formal and informal networks. Even more encouraging is that a number of these groups are popping up in nontraditional regions.
According to Carol Sands, founder of Angels' Forum LLC in Palo Alto, California, these angel funds or networks fall into three basic categories:
1. There are "social clubs," which bring angels together to view a high volume of companies and then allow investors to execute their own investment deals. This format is a little less personal, and it places the onus on entrepreneurs to make presentations that stand out.
2. There are those that are organized and run like funds, where angels put up a certain dollar amount upfront and one individual manages the process and selects companies to present at regular meetings. Sands says these groups typically invest as a single entity but don't do follow-up work with the company; their only interest is the cash-investment relationship.
3. The final format, into which Angels' Forum falls, is a fund that utilizes a venture capital structure and process, but instead of investing other people's money, they invest their own. These groups invest in companies as a single unit, typically require a board seat and provide continuous assistance. For instance, at Beverly Hills, California-based Idealflow Angel Fund LLC, which targets technology companies nationwide, assistance comes in the form of a "virtual incubator."
These are the basic structures of the new networks, but there are also hybrids like Arizona Angels Investor Network Inc. According to Greg Cobb, managing director of the Scottsdale, Arizona, network, entrepreneurs interested in securing funding from his group must find a lead investor, who doesn't have to be a member of the network. That person handles due diligence, negotiates on behalf of interested investors, and is responsible for taking care of the LLC formed to invest in the business.
For more information on nontraditional angel financing, check out "Angel Funds and Networks".
Nontraditional sources of angel financing
•Idealflow Angel Fund LLC
Structure: Fund investing as a single entity
Investment range: Varies with number of members (each one contributes $1 million per company and can be given permission to invest additional amounts)
Target companies: Early-stage tech firms
Geographic preferences: Asia and North America
Structure: Members investing collectively but able to opt in or out of any investment
Investment range: $250,000 to $2 million
Target companies: Start-up or seed-stage tech firms
Geographic preferences: Nevada and Northern California
•Arizona Angels Investor Network Inc.
Structure: Network of angels who invest individually
Investment range: $500,000 to $1.5 million
Target companies: Early-stage firms in any industry
Geographic preferences: Arizona
•Gathering of Angels
Structure: Network of angels who invest individually
Investment range: $300,000 to $1 million
Target companies: Predominantly seed-stage tech firms
Geographic preferences: Atlanta; Hilton Head Island, South Carolina; Houston; Phoenix; Santa Fe, New Mexico
•New Product Development Consortium
Structure: 130 CEOs of large multinational corporations
Investment range: Starts at $500,000
Target companies: Entities in all industries at the pre-seed stage (no company formed yet)
Geographic preferences: Global
Structure: Network of angels who invest individually
Investment range: $300,000 to $850,000
Target companies: Pre-seed-stage, early-stage and seed-stage companies and high-growth firms in all industries
Geographic preferences: Midwest (particularly Illinois, Minnesota and Wisconsin)
•The Louisiana Business and Technology Center at Louisiana State University has created a venture forum that will meet quarterly beginning in September. Entrepreneurs can present to interested angel investors. For details on the process, call the center at (225) 578-4842.
•The Genesis Group in Rapid City, South Dakota, is currently raising money for the $5 million Genesis Equity Fund and expects to begin making investments in October. The fund will provide start-up and seed financing ranging from $75,000 to $275,000 to firms with the potential to reach annual revenues of at least $1 million. This privately operated fund also has connections to governmental business assistance groups and can direct entrepreneurs to these resources for help creating presentation materials.
•Charleston Angel Partnership is creating a $5 million fund targeting high-growth New Economy firms, particularly those in the health-care, biotech and telecommunications industries. Companies should be just beyond the start-up stage with a management team in place, have a developed business plan and be looking for $300,000 to $500,000. The group meets monthly, and all deals are initially screened by the partnership administrator. For details, contact the group at firstname.lastname@example.org.
Cash In On Your Class
The rewards of college: friends, a degree . . . and venture capital?
Entrepreneur Magazine - May 2001
Seeking $500,000 to $5 million in angel investor capital? Your old alma mater may be able to help. UniversityAngels.com is a network of 75 university-specific sites that allow current students and alumni to post business plans for 90 days for review by accredited investors.
Interested entrepreneurs start the registration process by completing a business plan summary at the Web site. If accepted, business owners pay a one-time fee of $199, for the plan to be ranked and posted on the site. Prospective investors receive notice of all new postings. You'll have access to the entire network of potential investors; however, your school's alumni are given advanced notice of business plan postings.
If you successfully raise money through UniversityAngels, you pay a success fee to the organization.
Originally published in the May 2001 issue of Entrepreneur Magazine
The Web catches customers. Why not use it to catch investors?
By Cynthia E. Griffin, Entrepreneur Magazine - November 2000
Play Keyboard For Cash
The Internet is called everything from an information resource to a great equalizer. For those seeking business financing, another description comes to mind: facilitator.
A growing number of Web sites connect business owners with financing resources ranging from banks and venture capitalists to private investors looking to purchase stock in direct public offerings. Some charge hundreds of dollars for their assistance, while others offer services for free to entrepreneurs. Most are privately owned, but one-ACE-Net-is SBA-backed. And they each offer their own range of assistance. For example:
Direct Stock Market is an industry pioneer that began as an online market for direct public offerings in 1993 and has evolved into a site that helps connect investment bankers with entrepreneurs seeking $20 million or less (and refers those looking for more than $20 million to its banking partners). There's no charge to investors, but entrepreneurs whose applications are accepted pay a fee starting at $10,000.
Offroad Capital "acts as an agent to place private equities with a diverse network of investors, including qualified institutions and accredited individuals," says its first vice president of corporate finance, David Anderson. He also stresses that Offroad is not a matchmaking service but does help clients prepare investor information. The cost is a fixed percentage of gross proceeds, so it tends to vary from deal to deal.
Capital-Connection.com is a Web site for the more self-reliant. It charges entrepreneurs a $75 membership fee and lets them decide which investors they're interested in. Then it helps entrepreneurs review their proposals and match them with potential accredited investors in their database for 90 days. "If a match is made, we tell the investor by e-mail or fax, then send them a blind description of the project. If investors want additional information, we tell the entrepreneur the name and contact information of the investors," explains Dee Power, Capital-Connection.com's co-founder.
The key to finding the right online financing site is determining what you need: whether it's someone to help you through the complexities of conducting a DPO or the low-cost, low-maintenance approach of a matchmaker service. Whichever option you choose, remember, online searching should only be part of a comprehensive strategy to find financing.
Access to Capital Electronic Network, or ACE-Net, is a password-protected, fee-based national securities (stock) offering listing service. Initially developed by the SBA's Office of Advocacy, the site is managed by the Whittemore School of Business and Economics and maintained by the Research Computing Center of the University of New Hampshire. Regional ACE-Net Network Operators (listed on the site) manage the day-to-day operations and can charge entrepreneurs and investors up to $450 annually to enroll in the service. Investors are self-certified accredited individuals, venture capital firms, Small Business Investment Companies (SBICs) and institutions. In order to participate in ACE-Net, entrepreneurs must be eligible to sell securities in their company and must conform to SEC rules for Regulation A or Regulation D Rule 504. These requirements are detailed on the site.
BusinessFinance.com is a free Web site offering entrepreneurs access to funding ranging from commercial finance to venture capital. Those interested in venture capital should be seeking at least $250,000, have a management team with a proven track record and be in an extremely high-growth industry. Those seeking other types of investment funds will find sources for private placements, reverse mergers, acquisitions, mezzanine funds and convertible debt offerings. In addition to funding sources, this site features an expert center, which includes links to SCORE, basic information about business assistance and business software to purchase.
Capital.com is an online resource and financial portal offering small and midsized companies free access to capital and financial services ranging from loans and leasing to investment money. It considers requests ranging from $250,000 to $100 million from entrepreneurs who have been in business at least three years and have revenues in excess of $1 million. Included in the assistance this site offers are an automated online valuation system and a team of investment bankers with whom you can talk directly for free to determine what types of financing are best for your company.
Capital-connection.com is a membership organization that provides computerized matching of investors and entrepreneurs. This site says it does not give information to or accept listings from intermediaries, finders or brokers. For a $75 membership, a blind description of members' investment projects are posted for 90 days. The service then automatically matches investors with opportunities and contacts each party to let them know about the potential match. In addition, members get the site's list of venture capital companies and SBICs organized by state. They also receive a report on what venture capitalists really want and the booklet 50 Tips for a Better Business Plan.
Capital Matchmaker matches investors with investment opportunities worldwide from entrepreneurs who seek at least $25,000 in funding. This service charges entrepreneurs $89 to $249 to list their executive summaries for three months on the Web site. (The cost depends on how much money you're trying to raise.) You have the option of sending your summary in on a disk, by e-mail or by mailed hard copy ($30 extra charge).
Commercial Finance Online allows entrepreneurs to list their financing needs free and then offers two ways to find a match. You can do an easy search, which does not require registration, to find more generic financing, or you can become a registered member and submit a more detailed description of your needs. In this case, your profile is automatically matched to that of the finance members. This site offers a fairly exhaustive breakdown of financing options ranging from debt to equity.
Direct Stock Market, which began as an online market for direct public offerings in 1993, has now evolved into a site which helps connect investment bankers with entrepreneurs seeking $20 million or less (those seeking more than $20 million are referred to Direct Stock Market's banking partners). DSM will refer potential deals to investment bankers for underwriting and will distribute the banker's offerings electronically on their site. Those DSM can't refer to the investment bankers will be directed to the resources they need to help them become a potential investor-owned entity. DSM will also take doable deals that are below the investment bankers' financial threshold, spruce up the documentation, and then help the company raise the capital needed.
The Elevator is a password-protected site that allows entrepreneurs 150 words to hook investors. Registration is free for business owners and $150 for investors. In order to visit any area of the site, you must register at the reception desk. From there you move to level three to compose the 150-word pitch. This is reviewed by Elevator staff members, who charge $79.95 if revisions or more information is required (only about one-fifth of pitches posted on the site need revising). Once your pitch is approved, a full business plan must be posted on level four. This is where predominantly local investors go to review plans. Entrepreneurs go into the lounge to check to see how many people have looked at their plans. Entrepreneurs and investors meet on the conference level to negotiate deals.
freePrivateCapital.com connects accredited investors and early-stage growth companies. Entrepreneurs complete a company profile free of charge. It's placed in the database and is matched with all the investors who have created a free profile that matches the business owner's specified criteria. Investors can then log on to the site to review the entrepreneur's profile; if interested, they request that their profile to go into the entrepreneur's investor pool. This enables the business owner to contact the investors directly. Entrepreneurs can also authorize to have their contact information released to investors.
Garage.com is a dealer/broker that helps technology start-ups find seed funding via a password-protected Web site. Entrepreneurs who have developed a basic business idea and strategy, assembled a core management team and who want to raise $1 million to $5 million from accredited investors, venture capitalists or corporations start the process by going to the Web site and clicking on Garage. There you receive a password, which enables completion of a company overview. This is reviewed by Garage.com, and if it meets the criteria, the business is invited to complete a more detailed application. The most promising are invited to meet in person with Garage.com staff in one of their offices. The companies with the most interesting investment opportunities are placed in the Portfolio section of the Web site, where the business owners receive valued-added grooming services before being presented via online to member investors. Garage does not participate in negotiations between entrepreneurs and financiers.
Those firms who have been asked to submit a detailed application but don't become portfolio companies are placed in the DataMine, which investors can peruse on their own. In addition to the online connection, Garage.com hosts start-up boot camps and monthly showcase breakfasts to introduce portfolio companies to investors. Once a Portfolio company receives funding, Garage.com takes a percentage of funds raised and an opportunity to purchase stock in the respective company.
Idealive, a fee-based online marketplace where the creators of intellectual property-type products such as filmmakers, musicians, artists, visual artists and inventors can find accredited investors willing to provide funding for as little as 1 percent of a project to as much as 100 percent. For a $2,000 one-time fee (that includes the fees associated with creating a public company), arts entrepreneurs can list their project prospectus, which should include a description, reviews, interviews, links to Web sites, downloading capabilities and more. While anyone can view the artist's work, only registered investors can access the offering and bid via e-mail.
Currently, the site focuses on working with emerging artists who have a following but who have not gone that next step. By the end of the year, a Basement section will be added, where for $50 (no $50 fee until February 2001), any artists seeking funding will be able to post a prospectus.
NVST.com Inc. is an Internet site connecting entrepreneurs seeking early-stage (but not seed or start-up) capital to private equity funding sources. There are three levels of membership for business owners. The entry level is a free service where owners can list a brief business profile, the opportunity and contact information. Interested investors will contact you directly. For $39.50 a month, entrepreneurs can post their opportunity and also have the opportunity to search the site's advisor and investor database. A $1,995 fee entitles business owners to list their opportunity in the Private Placement Library for six months. This secured portion of the site is only accessible to accredited investors. Here entrepreneurs post only a one-line description and are automatically notified if an investor is interested. The business owner controls how much and to whom information is released.
In addition to facilitating matches, nvst.com offers an increasing number of tools at each membership level to help entrepreneurs complete tasks such as company valuation and investor due diligence.
TECNET, the Technology Capital Network Matching Service, is a computerized matching program that charges both the entrepreneurs and the potential investors. Entrepreneurs needing seed or early-stage funding pay $300 for one year and must fill out a four-page application detailing the company, market and how much money they're seeking. Business owners are also required to send an executive summary and one-page, five-year financial projection. Investors, who must self-certify that they are accredited by Security Exchange Commission standards, also complete a four-page summary detailing their investment criteria, industry they seek, geographic boundaries, investment amounts and what expertise they bring to the table. When a match is made, TCN sends the appropriate information to the investor, who must then contact the service for the entrepreneur's information. At the same time, the entrepreneurs is sent the contact data for the investor.
The Capital Network is a fee-based matching service that focuses on connecting early-stage entrepreneurs seeking $500,000 to more than $10 million with venture capitalists as well as corporate and accredited investors. Before paying $750 for six months, entrepreneurs can submit an application characterizing the venture along with an executive summary to see how many investors in the TCN database match up. If you like the results, pay the fee, and if an investor indicates an interest, TCN sends contact information to both parties.
The fee includes review of the executive summary and assistance in formulating an effective one. In addition to the matching services, TCN hosts international venture conferences, hosts a monthly angel dinner and provides for-fee mentoring services on a case-by case basis.
Universal Business Services is a fee-based matching site. For $495, Universal will list an entrepreneur's opportunity on the site until funding is received. These projects can be viewed by anyone with access to the Internet, but in order for potential investors to obtain contact information for a business owner, they must register.
Virtual Wall Street connects small to midsized companies seeking anything from seed to follow-on funding with accredited and corporate investors through the Virtual IPO section of its Web site. Eligible entrepreneurs fill out an application form in the corporate services section detailing the company, its financial needs and management team, and within 48 hours you will be notified if your are accepted. Business owners are listed for free in the Virtual IPO, and Virtual Wall Street will act as your agent in conjunction with the two broker/dealers the site is affiliated with. The fee for the services depends on the company but can range from a percentage of the funds raise to equity only.
Vista Growth Capital, VistaWEB is an investment banking firm that has created a comprehensive digital marketing program targeting entrepreneurs in emerging companies with proprietary technologies. Business owners can find funding ranging from private placements to investors for their IPOs. Vista, whose Web site is available in 10 languages, takes a company through the entire funding process from preparing a private placement or IPO offering to creating an online road show and even a live Webcast. The cost ranges from $25,000 to $250,000 and begins with a $1,500 submission fee. Once a business plan with financials is submitted, Vista subjects it to a merit approval due diligence process. If approved, the company has an opportunity to go into the sites' IPO Spotlight. Anyone with Web access can view the offerings here, but only sophisticated, accredited foreign investors who are registered with Vista have the opportunity to invest. Vista does not charge stockbroker commission, underwriting or finder fees and will invest up to $1 million itself in technologies it considers especially promising.
Here are a few guidelines to help you evaluate online funding services:
"How long has the online company been in business? At least one year is a good rule of thumb," says Dee Power of Capital-Connection.com.
"Evaluate the Web site," says Power. "The more educational information provided, the more it indicates a depth of commitment to helping entrepreneurs find capital."
"Who is behind the matching service?" asks Power. "Is there a person or company you can contact for more information?"
"Carefully examine 'free' services. Some sites allow entrepreneurs to list for free, but if a match is made, you must pay to find out who you're matched with," says Power.
Who are the investors on the site? Are they venture capitalists, institutional investors, private foundations or accredited investors? Are they listed on the site?
Listing his company on an Internet investor matching service was a no-brainer for Gary Puckett, co-founder and COO of Los Altos, California-based SalonsConnect.com, a business-to-business Web site that connects salon owners with manufacturers, distributors and service providers in the beauty industry.
"We embarked on a number of fund-raising avenues. A few people suggested going to the Internet," explains Puckett. After reviewing several different Web sites, what sold him on his final choice was the price and simplicity of the information request.
After two months on that site, Puckett received about 30 inquiries, most of which came from brokers offering to help the company find money, and he has serious discussions in the works. "One reply came from a [venture] company with a large operation based out of Europe, and this is a group we've begun some initial discussion with and provided our business plan [to]," says Puckett. He studied that VC's Web presence and researched its investors before sending information about SalonsConnect. He hopes these simple actions have helped separate the dross from the potential gold.
•Clay Womack Direct Stock Market, Mike Harris, (310) 566-4500
•Dee Power, Capital-Connection.com, P.O. Box 18460 Fountain Hills, AZ 85269, (480) 837-9590
•OffRoad Capital, David Andersonm, (415) 796-5127
•Internet Capital Bulletin Board, www.icbb.com
From Zero To 60
Investor Angels offer seed capital and support for start-ups.
By Paul DeCeglie, July 18, 2000
Business Start-Ups magazine, January 2000
Would $100,000 help get your Internet-based business off the ground? Investor Angels (IA) is offering seed capital and high-powered support to start-ups whose proposals are selected for development. IA launched its Web site (www.investorangels.com) in 1998 in search of a few viable concepts. "We were hit with hundreds of proposals from visionaries all over the country," reports David Cook, founder and CEO of the Hollywood Beach, Florida, company.
Cook, a seasoned entrepreneur with management and high-tech experience, says IA will select proposals with the best potential and provide those businesses with everything they need--like start-up funds, business plans and help going public. "If your plan is sound, Internet-focused, and you're committed to making your business a success, Investor Angels will be there for you," Cook promises.
To maximize the number of start-ups financed and developed, Cook is taking IA public with an SEC Regulation A offering. "We plan an IPO of 5 million shares in [December 1999]," he said at press time. "Each shareholder will be able to vote on which business proposals to pursue." At the initial virtual proxy meeting, the first 40 proposals to win more than 51 percent of the votes will be financed and developed. "Shareholders may also purchase pre-IPO shares in each venture, affording them the opportunity to participate financially in ground-breaking businesses without the need for the traditional [investments of] $100,000 to $200,000," Cook adds.
Once a proposal has been selected by IA's angels, IA forms a subsidiary corporation to develop the concept. IA streamlines the incorporation, bylaws, minutes, tax registration, corporate-banking facilities and Employee Stock Ownership Plan. After receiving the seed capital, the management of the new subsidiary completes the business and marketing plans; registers the trademarks, patents and copyrights; and registers a prospectus to raise operating capital.
"Each step of the way, [entrepreneurs] are guided by angels on an accelerated path more compatible with the growth demands of Internet-based businesses," says Cook. "On their own, most Internet visionaries don't [know] how to start or run a company."
Cook should know: In a previous life, he performed due diligence for major investment banks. In three days, Cook would do a top-to-bottom technology assessment and determine the start-up's chances for survival in the marketplace, then spend three weeks on corporate due diligence to determine who owned the company--or if a company even existed at all. He uncovered a variety of blunders, such as misfiled incorporations, negligent tax registrations, use of the wrong business name, and--his personal favorite--articles of incorporation that banned the company from operating in its existing business.
Says Cook, "Our goal is to do all that messy corporate stuff and do it right the first time so the visionaries can focus on winning the race. We like to think of it as `Business incubation at cyber-speed.' "
Paul DeCeglie (MrWritePDC@aol.com) is a former staff reporter for Journal of Commerce and American Banker
Highway To Heaven
You don't need to look on high--and low--for angel investors. Try these proven paths.
By Art Beroff and David R. Evanson, Entrepreneur Magazine - June 1999
Through the sheer ingenuity of their Internet-based promotional and sweepstakes management service, RealTime Media Inc. co-founder Chuck Seidman and his partners, Bruce S. Allen, Bob Auxier, Peter Jensen and Charles Ruderman, have persuaded some of America's most admired companies to hire them.
The Haverford, Pennsylvania, firm has a lock on the technology for creating scratch-and-win promotions on the Internet (patent pending). Rather than scraping faux gold leaf off of a paper ticket, Internet surfers scratch away with their mice to reveal whether they've won prizes.
As it turns out, the lure of winning $1 million instantly--or, as with the current Beat the Street promotion, $20 million for correctly guessing the close of the Dow Jones and NYSE average on a particular day--is an extremely effective technique for directing Internet surfers to a particular site. "It's all about driving traffic," says Seidman, 47. "Being on the Internet means nothing unless you can get traffic to your site and convert [surfers] into members or give them incentive to take a desired action." Apparently the heavyweights agree, because the likes of Microsoft, Lycos, Ford, Yahoo!, the NFL and CDnow have hired RealTime to create custom instant-win promotions to drive traffic to their Web sites.
All this has been accomplished with the kind of entrepreneurial panache successful companies are made of. Still, Seidman understands that Internet promotion is big business--and his competition is well-funded. "To compete and take this company where we know it can go, we need more capital," he says.
Seidman figures his company needs $3 million, which has him beating the bushes for angel investors. Unlike the promotions he's creating, bringing angels to the table is no game.
For companies like RealTime, raising money from angels, or any kind of investor for that matter, generally is done in four steps: identifying prospects, preparing to contact them, contacting them and closing them. But as with falling dominoes, everything depends on that first critical action. And in this case, entrepreneurs can't possibly hope to finalize deals with angel investors until they succeed in locating prospects.
So where do angels hover? There are a number of predictable haunts, ranging from Internet and chamber of commerce cliques to universities, business incubators and your professional advisors. Here's a rundown on how to get started. (And remember, none of this will be easy, so be prepared to dig hard.)
For many people, a starting point in the quest for angels is the Internet. But keep in mind that at this point, the Internet is a communications medium, not a capital-formation medium. It may turn up leads, but it's not going to deliver the goods lock, stock and barrel.
A good first stop is ACE-Net, an SBA initiative that uses the power of the Internet to match entrepreneurs with accredited investors. By listing your deal on ACE-Net, you make yourself known to the thousands of angel investors who have access to the site.
Moreover, according to Jere Glover, chief counsel of the SBA's Office of Advocacy, ACE-Net now offers contact information for 38 so-called nodes that can act as entrepreneurs' connections to angel investors. "Many of these nodes operate their own angel networks," Glover says. Their names, addresses and telephone numbers can be found at https://ace-net.sr.unh.edu. (The "https" designation indicates that ACE-Net is a secure site, with limitations on access.)
You can also type the words "angel investor" into your search engine, and all manner of matter will surface. There's something new on the Internet every day and some of what comes up may be worth looking into. But beware: There's a lot of junk out there, too.
Another place where angels sometimes congregate is the business incubator. Angels like new business activity, and incubators are often full of promising start-ups. According to Dinah Adkins, executive director of the National Business Incubation Association, some 60 percent of the 550 business incubators in North America offer formal or informal access to early-stage financing, which often means angels.
In addition, many incubators screen applicants, offering what amounts to a quality-control mechanism that attracts investors. In short, you can gain access to angel investors simply by being a member of the club. You can obtain a list of incubators nationwide by sending a self-addressed stamped envelope to the National Business Incubation Association, 20 E. Circle Dr., #190, Athens, OH, 45701-3751. You can also call (740)593-4331 or visit its Web site at http://www.nbia.org.
Universities with entrepreneurship programs can be fertile ground for finding angels. The connection between entrepreneurial academia and successful business start-ups is so well-established (Stanford University and Cisco Systems--need we say more?) that universities attract even more angel investors than incubators do.
The important thing is getting in, seeing if there's a vein to be mined and, if there's not, moving on. Many universities have alumni angel networks, SBA-sponsored Small Business Development Centers, and professors and deans who are wired into angel investors, as well as new venture workshops that are really networking opportunities.
If there's a university nearby and it has an entrepreneurship program (no matter how formative), it's worthwhile to call someone on the teaching staff, make an appointment and sit down with him or her to see how the program can help you find investors. If you have a choice of universities nearby and you want to determine which has the top program, buy a copy of a study that was published in The Journal of Business Venturing called "Measuring Progress in Entrepreneurship Education" by Elsevier Science. Call (800)282-2720 for a reprint of this article, which appeared in Volume 12, Issue 5 of the publication. The cost is approximately $44.
There are any number of formal networking events organized for the express purpose of putting angel investors in direct contact with capital-hungry entrepreneurs. For example, MIT Enterprise Forums, which are held in some 14 cities across the United States and five additional international cities, take the form of a business-plan presentation--followed by a critique of both the plan and presentation--to professional investors, who are often institutional venture capitalists. But there's plenty of time before and after the program to network, see and be seen, pass out cards, and find leads.
Other formats include panel discussions, breakfast workshops, cocktail receptions and brown-bag seminars. Sponsors range from chambers of commerce and professional consulting organizations to universities and state economic development organizations. There are also venture fairs, which give entrepreneurs direct contact with angels in a "walk the midway"-type arrangement. You need to be careful with fairs, however. Many such events are organized to put companies in front of institutional venture capitalists. If you don't qualify for that kind of investment--and very few small businesses do--you'll find trying to get a slot to be a frustrating and generally unproductive use of your time.
To find your venue, call the nearest chamber of commerce and ask if they have a venture group. If you need to locate a chamber near you, call the U.S. Chamber of Commerce in Washington, DC, at (202)659-6000 or visit its Web site at http://www.uschamber.org. If you want to find out if there's an MIT Enterprise Forum scheduled for a city near you, call the MIT Enterprise Forum headquarters at (617)253-0015 or visit its Web site at http://web.mit.edu/entforum/
At the end of the day, it's still the lawyers and accountants who best know where the money is. And either overtly or subtly, part of what many of them are selling is access to investors that might have an interest in your business. In fact, if you own a hotshot technology or Internet company, some law firms and accounting firms will actually defer some (or, if you're lucky, all) of their fees until funds are raised.
At RealTime, Seidman retained Philadelphia-based powerhouse Morgan, Lewis & Bockius, where Stephen Goodman is the lawyer of choice to the region's growing cadre of tech companies. "If there's somebody we need to get to," says Seidman, "he can be effective in making an introduction."
Unfortunately, you can't simply call an attorney or accountant and tell them to turn on the spigot; it's got to be done in the context of an engagement--some engagement, any engagement, that gets everything on a professional footing, such as assistance with financial projections. As the twist to the old saying goes, it takes money to raise money.
Meanwhile, back at RealTime, Seidman and his partners are caught in the archetypal entrepreneur's warp. They're so busy building and running the business that raising money becomes even more challenging. "The only thing I can say," says Seidman, "is that it's a good thing there are so many paths we can take. Otherwise, we'd never find the time to find the investors."
In addition to the organizations listed in this column, the following are some useful Internet privacy sources for small companies:
•Association for interactive media (http://www.interactivehq.org)
•The center for democracy and technology (http://www.cdt.org)
•U.S. department of commerce (http://www.doc.gov)
•Electronic direct marketing association (http://www.edma.org)
•Electronic privacy information center (http://www.epic.org)
•Federal trade commission (http://www.ftc.gov)
If you don't want to join an online privacy seal program, try following the Federal Trade Commission's principles of fair information practices, which are available at
RealTIME Media Inc.,http://www.realtimemedia.com
David R. Evanson's newest book about raising capital is called Where to Go When the Bank Says No: Alternatives for Financing Your Business(Bloomberg Press). Call (800)233-4830 for ordering information. He is a principal of Financial Communications Associates in Ardmore, Pennsylvania. Art Beroff, a principal of Beroff Associates in Howard Beach, New York, helps companies raise capital and go public.
What Price Advice?
When looking for financing, consider the expertise a value-added investor can offer.
By David R. Evanson, Entrepreneur Magazine - July 1997
Entrepreneur Gerard Powell attributes his success to a simple strategy: Take a product or service that is sold only to the wealthy and make it affordable to the masses.
Following this formula in the early '90s, Powell parlayed a modest investment into a small fortune with his Y-Rent program, which allowed consumers to buy homes for no money down, with monthly payments not much higher than their rental payments.
So in late 1994 when Powell learned that cosmetic surgery was something only very wealthy consumers underwent, a light bulb went off in his head. He joined with partners Charlie Lynn and Vincent Trapasso in their fledgling venture, Cooperative Images Inc., which markets elective surgeries on behalf of physicians.
"The key to the market was making the procedures affordable," says Powell. Through elaborate financing mechanisms and tight credit controls, Powell reduced the price of some surgeries to just $38 a week.
But to put the business over the top, Cooperative Images wanted an infusion of capital to ramp up marketing efforts and increase the number of physicians under contract. While Powell was certain of his ability to create a sales and marketing dynamo, he was less certain in the arena of high finance. "I began to question exactly what I needed," says Powell. "Was it just capital, or was it something more?"
What Powell had hit upon was the great divide in early-stage financing. Did he need a passive investor who would simply deliver a check at the closing table? Or did he need a more active investor--sometimes referred to as a value-added investor--who would help guide the company to the next growth plateau?
The distinction is vital to consider. After all, some entrepreneurs don't appreciate advice at every turn from what appears to be a meddling investor. At the same time, a business owner who wants help from a new shareholder and doesn't get it might flounder his or her way into bankruptcy.
For Powell and Cooperative Images, these considerations were more than academic. Offers of capital came from two investors occupying opposite ends of the spectrum in terms of their involvement in the company--and left Powell searching for the answer to his happy dilemma.
One of the potential investors was Richard Gwinn. Gwinn's company, Radnor, Pennsylvania-based The Abbotts Organization, has been buying, selling and investing in companies for more than 20 years. Gwinn's approach to early-stage investing is hands-on; he not only invests in companies but also offers strategic management services.
The other potential investor was a much larger competitor from Powell's home-building days. This investor had enjoyed substantial success but, in Powell's opinion, didn't have as much knowledge of or connections with the capital markets Powell felt would be critical to Cooperative Images' long-term success.
While Gwinn concedes that value-added investors are not right for every entrepreneur, in most cases, he says, they can play an important role in shaping a company's destiny. "The reason an early-stage company should seek a value-adding investor rather than simply a source of funds," says Gwinn, "is that management, financing, cash management and marketing hazards are absolutely critical to overcome, and an experienced value-adding investor, if he or she is the right one, will spot costly problems early on."
In the case of Cooperative Images, Gwinn brought big guns to the offering table in the form of other experts and professionals who would invest along with him. These included a former partner from a Big Six accounting firm, a corporate attorney, and a successful entrepreneur who had done well in the telemarketing industry.
The expertise in telemarketing was more than a little relevant since a good part of Cooperative Images' success relied on effective telemarketing operations. In Powell's mind, these investors possessed not only a deep well of related experience but also the contacts in investment banking that would help him attain his ultimate goal of setting up an initial public offering or selling the company.
While Gwinn espouses a hands-on approach to investing, he knows it doesn't work in every situation. "If you're autocratic or egocentric in nature," he says, "you don't want the kind of investor who is going to challenge your thinking on sensitive and critical areas."
In addition, Gwinn says that entrepreneurs who can afford the price of outside assistance can also forego seeking out value-added investors. "You can get all the expertise, guidance and counsel you need from accountants, attorneys, marketing and financing consultants," says Gwinn.
There's an important distinction between advice from shareholders and consultants, however. "The consultant is often passive, providing advice, which if followed, should generate a successful result. The value-added investor, on the other hand, will provide advice but has a vested interest in its successful implementation."
If all this sounds a little too touchy-feely, there is a more concrete reason for considering what type of financial partner you really want. In general, hands-on, value-added investors require more equity in a company than strictly passive investors. Why? The value-added investor is taking the same financial risk as the passive investor but with the additional investment of his or her time. This added investment generally translates into owning a bigger piece of the company.
This was true in Powell's situation. Gwinn and his co-investors offered a package that would give them about 18 percent of the company. The passive investor's deal would cost Powell just 12 percent of his equity. Powell feels that 6 percent difference may someday soon be worth $6 million. Knowing this, he is reluctant to give it up unless absolutely necessary.
What's swaying Powell in the value-added direction, however, is the other great elixir of wealth: time. "I can grow the business," he says. "But if at the end of three years we want to sell it, the company will not get the highest possible price unless it's packaged properly right from the beginning, which is what I hope a value-added investor would help us do." In other words, getting the highest possible price on the back end might be worth some sacrifice on the front end.
Though at press time Powell was undecided about which offer he would take, he believes going with hands-on investors might pay big dividends down the road. "All schooling requires tuition," he says. "Mine might be 6 percent. But with the knowledge I acquire, I'll make it up 10 times over my lifetime."
Contact Sources, The Abbotts Organization, fax: (610) 964-3630;
Can Women Raise Angel Funding?
Despite Impressive numbers from women entrepreneurs, many still struggle to attract equity capital for nontech ventures.
By Crystal Detamore-Rodman, December 27, 2006
When Sharelle Klaus launched Dry Soda in 2005 to produce and distribute her brand of nonalcoholic beverages to high-end restaurants and food retailers, she didn't have to look far for potential backers. As president of the Forum for Women Entrepreneurs in Seattle, it was her job to network with angel investors. So when it was time to raise equity capital of her own, she quickly put her address book to work. "When I started, all my connections were with high-tech investors," recalls Klaus, 37, "but those high-tech investors knew other investors." Not only did those other connections invest in her business, but they also helped her staff the approximately $1.5 million company and find distributors. Klaus also recently completed a $1.5 million round of angel financing.
A recent study from the University of New Hampshire Center for Venture Research shows that women outperformed all entrepreneurs in receiving angel investments to fund their business ventures in 2005. Although women-led ventures accounted for 8.7 percent of the entrepreneurs seeking angel capital, 33 percent of those women received angel dollars in 2005, while the overall rate was just 23 percent, according to the study.
"That's a really recent trend, and I was amazed when I saw it," admits Stephanie Hanbury-Brown, founder of Golden Seeds LLC, an angel investor group based in Cos Cob, Connecticut, that invests exclusively in women-led firms. "The [number of] women entrepreneurs getting venture capital has [hit] a 10-year low."
"At the same time, women are starting businesses at twice the rate of men today," Hanbury-Brown adds, citing a statistic from the Center for Women's Business Research. "The quality of the women starting businesses and the quality of the businesses they are starting has increased in the past several years."
But advocates for women-led firms argue that entrepreneurs like Klaus may be exceptions. More often than not, they say, women entrepreneurs lack access to the traditionally male world of angel investing. That--combined with angels' tendencies to invest in only high-tech ventures--has kept many women entrepreneurs at arm's length.
"[Until recently], women's experiences were more in industries that didn't grow in scale as much, so they were not as likely to be candidates for large equity investments," says Marianne Hudson, director of angel initiatives for the Ewing Marion Kauffman Foundation.
In fact, it was the "imbalance of VC investments that go to men entrepreneurs" that moved Hanbury-Brown to launch Golden Seeds in 2004. "I realized women were starting companies in a whole range of industries [where] typical angel investors probably would not get beyond the executive summaries in their business plans," says Hanbury-Brown, whose group invests in a variety of industries in addition to technology.
Currently, only about half a dozen women angel groups operate in the U.S. However, that number is likely to grow. "Anecdotally, I would say there is a trend toward more women becoming investors but also more women becoming investors and wanting to invest in women," says Maggie Kenefake, manager of growth entrepreneurship for the Kauffman Foundation.
Experts say women investors are more likely to support a broader range of investment opportunities. Adds Kenefake, "Their number-one priority is a solid investment and a healthy financial return, but I think women investors [are] bringing different life experiences to the table, [giving] them a different perspective, and perhaps they will consider opportunities that their male counterparts might not."
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