Where do you go to find venture capital? While you can find individual angel investors through referral from an accountant or attorney, angels increasingly participate in a variety of networks.
1. NONPROFIT ANGEL NETWORKS. There are more than 50 loose-knit organizations nationwide through which investors learn about opportunities, attend programs about investing and develop a sense of community. These networks are usually run by nonprofit entities, have tax-exempt status and are oriented toward economic development. The greatest benefits come from community-building among investors and creating a more efficient marketplace for entrepreneurs to approach sources of venture capital.
2. PLEDGE FUNDS. A more recent phenomenon involves pools of funds in which investors (anywhere from a handful to dozens) pledge a specific amount of money to be invested in private-equity transactions that are selected and managed by the group. Sometimes the group has centralized paid staff; sometimes it is led and organized by a lead investor. These groups set legally rigorous standards, are focused and are designed to profit from multiple transactions.
3. THE CLUB APPROACH. In this model, investors place a set amount into a “club” account that is used like a venture fund to make investments found and voted on by club members. This approach can be staffed or unstaffed. More money can be accumulated than an individual can afford and a more diversified fund can be created. Group dynamics are involved because each member must review potential opportunities in order to decide “vote” for or against a deal.
4. CEO ANGELS. A small venture fund, usually a limited partnership, is created by investors drawn from a specific business community. They provide assistance as well as capital to chosen companies, which are usually from the same field. Members of the group may take on general partnership responsibilities, or professional managers can be employed. This model is very similar to the traditional venture-capital model, except that investments are more focused and the limited partners are more active in helping to find opportunities and to provide hands-on assistance to the companies chosen.
5. ACTIVE ANGELS. In this model, angels are more active in the role that they propose to play in the growing company once funds are committed. Some angels in this model are really looking for full or almost full-time employment with the companies in which they invest.
Adapted with permission from Raising Capital by Andrew J. Sherman (Amacom Books).
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