FOR INVESTORS Member Benefits About Angel Investors Become a Member Investment Opportunities

A critical component for small companies seeking to grow is access to necessary capital. New and emerging companies need capital, but are limited the ways in which they can raise that capital. Usually, companies are founded with the entrepreneur's own resources and that of their friends and family. These dollars are usually limited, and very early on additional financing is needed. Startup and emerging companies are rarely able to receive bank loans and therefore look to other sources for needed capital. These include:

• Investment dollars from strategic partners (companies with similar products and services) perhaps hoping to market the products or services in the future,
• "Angel investors" (wealthy individuals who make investments in new and emerging companies)
• Venture capital companies (companies whose sole purpose is to invest in companies),
• Private placements, and public offerings.

Venture capital companies may look at over 100 business plans in a year and invest in perhaps one or two that meet their criteria. This leaves a tremendous need for sources of investment capital into new and emerging companies.

Thousands of the companies throughout the US, with outstanding potential for growth, do not meet the standards set by venture capital companies. It is easier for the VC to invest in a few large deals than many small deals. Also, most VCs concentrate on particular industries, geographic locations, well established companies, or other criteria.

Over the past few years, liberalization of certain securities laws have resulted in increasing levels of investments by individuals through private placements. Changes in the laws, particularly under Rule 504 of Regulation D of the federal securities laws, allow for investors, under certain circumstances, to resell stock which they have purchased in one company in a 12 month period of time (instead of 24 months) after the company has effected an IPO. This allows an investor to possibly "cash out" at an earlier stage. Relaxation of state and federal laws make it possible for companies to approach large numbers of potential investors without the cumbersome and expensive registration procedures relative to "public offerings". The principal requirement of the new laws is that the offering must be limited to wealthy investors, or what is refereed to as an "accredited investor".

"Accredited Investor" - Under Rule 501 of Regulation D (17CFR 230.501) of the Securities Act, the definition of an "accredited investor" reads in part as follows:

1. (5) Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000 or
2. (6) Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.

Under these rules and regulations, thousands of new and emerging companies throughout the country have turned to individual investors for the necessary capital to make their company grow. It is estimated that private investors have invested $30 to $50 billion annually into private companies at various stages of growth. These investments are made at the seed, R&D, and start-up stages of a company. These private investors are referred to throughout the industry as "Angel" investors.

The term "Angel" was originally coined years ago to describe wealthy individuals who backed Broadway shows primarily for the privilege of rubbing shoulders with theater personalities.

Today, angel investors are usually financially sophisticated individuals with a high net worth, willing to provide seed, start-up, and growth capital, or high-risk companies for an expected large return on their investment. Angel investors seek companies with high growth potential, exciting products and/or services, and proven management.

Angel investors usually possess the discretionary income as well as the personality required for risky venture investments. Many have set aside a part of their investment portfolio for such investments.

Two problems exist in the angel investment market. First, angel investors prize their privacy and are secretive about their investment interests. Such angel investors are difficult to find. Most angel investors are located primarily by word-of-mouth or professional intermediaries. However, there are now several angel capital networks and organizations throughout the US formed for the specific purpose of matching angel investors with entrepreneurs seeking funding. Some are money making ventures while others are not-for-profit. Some charge the angel investor a fee then charge the entrepreneur a fee for distributing information on the company to the angel investors. This fee may be a small token fee to show the good faith of both the investor and the entrepreneur while others charge not only a fee but a percentage of the funds raised through their organization. It is important for both the investor and the entrepreneur to check out the organization to see if it fits their particular needs. It is also very important that any organization comply with all securities laws to avoid serious complications in the future.

The second problem relates to the angel investor. It is difficult for an angel investor to see enough "deals" to determine which one offers the greatest potential for a high return on his investment. There are no organizations or publications listing companies seeking capital.

Most of the Angel investor organizations that exist have a method of introducing companies to the investor, however, it is usually done with a simple 1-3 page summary of the company rather than a full business plan, thus leaving it up to the investor to determine his level of interest in pursuing the investment possibility, request the business plan and doing all of the necessary due diligence on the company. The angel organization usually charges the entrepreneur a fee for this service, thus limiting the investment opportunities to only those companies who are aware of the organization and willing to pay the fee.

Some cities have organizations such as venture clubs where companies and angel investors meet. An excellent example of such an organization in the Rocky Mountain area is the Rockies Venture Club in Denver. This club has a membership of several hundred and has a dinner meeting each month with an attendance of between 150 to 250. However, even at such meetings it is difficult for the angel investor to locate companies which meet his criteria for investment.

More effort is being made throughout the US to establish methods whereby entrepreneurs can meet investors and investors can become aware of excellent investment opportunities with emerging companies. VentureVest Capital Corporation in Denver, is one company developing a program designed not only to bring entrepreneurs and investors together, but to help companies become successful and assist the angel investor in doing due-diligence on companies.

Angel investors look at companies at different stages of growth. The amount of money required and the equity position that the investor receives for investment will vary depending on the product, and the cost of developing, manufacturing and marketing that product. At each progressive stage, the number of shares or percentage of the company relinquished to the investor will decrease. However, at each progressive stage, the risk to the investor will also decrease. The stages are usually defined as follows:

• Seed Capital - This is a company in the idea stage, sometimes in the process of being organized and proving a concept. The investor becomes one of the original insiders of the company, and may or may not take an active roll in management, sitting on the board of directors, or other form of participation. The investment may be in time as well as dollars. The risk is higher at this stage, but usually the equity position is greater and, if successful, a greater return on the investment.
• Research and Development - At this stage, the investor is usually helping to finance the research and development of a product. The company has usually been formed, an initial infusion of capital may have been made by the founders, but more capital is needed to bring the product to a working prototype stage. Investment for research and development may even be needed in mature companies and may offer the investor a tax write-off, a share of the profits of the product and/or stock in the company.
• First Stage/Start-up - At what is considered the first stage or start-up stage of a company, the prototype is usually completed and tested and ready for marketing. Market studies may have been completed, a management team in place and a business plan developed.
• Expansion Stage/Second stage - The company may be in the early stage of expanding commercialization of the product, and is need of capital for inventory, advertising and marketing. Usually the company has a strong management team in place, is generating revenues but may not show profits yet.
• Mezzanine - The company has increasing sales, is near break-even or is profitable and needs funds for further expansion, marketing or working capital. The company may be looking toward an IPO in the near future or some other major corporate development.
• Bridge - The company needs what might be considered short capital to reach defined a position. This could be a merger or an IPO or funds to carry the business while other financing is arranged.
• Acquisition or Merger - The company needs capital to finance an acquisition or a merger of another company.
• Turnaround - The company may be in need of capital to effect a change from unprofitability to profitability. The company may have gone through a problem period and needs capital to turn the company around. The effect of the infusion of capital is usually clearly defined in a business plan. Remember, while company owners view survival money as the solution to their problems, it is usually a symptom of underlying management, manufacturing or marketing problems.

The investor must establish in his own mind, the criteria for investing. Some elements of this criteria might include:

• Investing in markets and technologies that he is familiar with.
• Investing close to home, (one days drive or flight, allowing for personal review of the business whenever desired.
• Being an "active" investor. Perhaps serving on the board of directors, consulting, etc.
• At which stage of a company he might want to invest, seed, R & D, startup, expansion, mezzanine, etc.
• The time frame for exiting; How many years to "cash out".
• Amount of the Investment. What percentage of the investment portfolio is invested in the deal.
• Whether or not to co-invest with others.
• The amount of risks-to-reward to be taken.
• Terms of the investment. (It is necessary to carefully study the terms of the investment).

When considering an investment, look at a number of deals before taking the step. Feel comfortable with the business plan of the company you are looking at. Research the market and verify the claims of the company management. The investor should check patents, proprietary information and information critical to the success of the company, including speaking to others who are associated with the business or it's management. He should carefully assess his own suitability for the business. And determine if it is a business that he knows or understands and feels comfortable with.

It is recommended that the investor look at potential investments with the assistance of professionals, capable of doing the proper due-diligence on the company and ensuring that the structuring of the deal is in the best interest of the investor. Paying an experienced consultant for these services could be worth a great deal in the long run.