The good news is that angels have a clear field in the early-stage sector. The bad news is that the market is extraordinarily inefficient. First and foremost, no clearinghouse of information exists on the size, shape, and pricing of deals on the one hand and on the location and contact information of angels on the other. In fact, with some significant exceptions, if an entrepreneur wanting to attract angel capital were to take out an ad in the Wall Street Journal or otherwise promote his or his concept publicly, that method could be deemed illegal and enforcement action could be taken.
An SEC rule forbids “general advertising and general solicitation” for investors in privately held companies. (Start-ups, by definition, are privately owned.) As a consequence, angel access to interesting deals has been hit-or-miss.
To find angel investors, you usually engage in what is euphemistically called networking ‘” going to industry events and rubbing elbows with the other participants with the hope that some of them will be looking for investments, mining professional relationships (asking your lawyer and/or accountant for leads, for example), and exhausting your Rolodex.
Local business associations are the most common way to get plugged in, but the networking process takes a lot of time ‘” usually more time than is available after you’ve started operations. It’s best to establish your Rolodex well before you start operations ‘” having your angels lined up first is even better. You alone may not be able to devote enough time to the process, and your management team may need to help. In addition, understand that getting capital from angels is not like withdrawing cash from an ATM ‘” if you’re putting together an angel round with multiple angels, getting the capital you need can take 6 to 12 months.
The dirty shame, of course, is that, because of market inefficiency, square pegs are unable to find square holes very effectively or frequently. You may have an extremely interesting and attractive proposal, but if you fail to bump up against an angel or two, your concept can starve in its infancy.
On the other side of the coin, a ready, willing, and able angel may wind up with nothing but second-rate deals to review because there is no reliable way to tap into a superior deal stream. The nature of the beast is that a lot of bad deals get funded and a lot of good deals do not.
In recent years, a number of activists have tried to lessen the market’s inefficiencies, but none of them ‘” to date, anyway ‘” has been significantly successful. The marketplace is inefficient, and the players simply have to get used to it. Entrepreneurs looking for angels must be extraordinarily creative in figuring out ways to get their executive summaries around within the limits of the law. If you don’t make the effort, you don’t have a fair chance of reaping the rewards.