Angel Capital: How to Raise Early-Stage Private Equity Financing

404 Pages·2005·3.889 MB·English

by  Gerald A. Benjamin, Joel B. Margulis

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Angel Capital
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Angel Capital
How to Raise Early-Stage
Private Equity Financing
GERALD BENJAMIN, M.S.
JOEL MARGULIS
WILEY
John Wiley & Sons, Inc.
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Copyright © 2005 by John Wiley & Sons, Inc. All rights reserved
Published by John Wiley & Sons, Inc., Hoboken, New Jersey
Published simultaneously in Canada
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Library of Congress Cataloging-in-Publication Data:
Benjamin, Gerald.
Angel Capital : how to raise early-stage private equity financing / Gerald
Benjamin, Joel Margulis.
p. cm.
Includes index.
ISBN 0-471-69063-5 (cloth)
1. Angels (Investors). 2. Venture capital. I. Margulis, Joel, 1937– . II. Title.
HG4751.B458 2005
658.15'224—dc22
2004019938
Printed in the United States of America
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To Carol,
For your patience,
support,
encouragement,
and
love
—Gerald Benjamin
________________________________
To Juliette and Lester Rosenblatt,
who have the right thoughts
and
do the right things
—Joel Margulis
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Contents
Preface xv
Acknowledgments xxv
Introduction xxvii
PART ONE
THE CHALLENGE AND THE SOLUTIONS
CHAPTER 1
The Challenge 3
Introduction 3
The Challenge 3
The Angel Investor 7
Structure of the Private Investor Market 8
Making Sense of the High-Net-Worth Market 10
Investor Activity in Early-Stage Deals 12
Angels: A Golden Capital Source 13
Investors Worth Accessing 14
CHAPTER 2
The Solution: The Private Placement 17
The Private Placement 17
Selecting the Right Capital Source 20
Is Your Deal Financeable? 22
Are You Financeable? 29
Is Your Risk Financeable? 32
The Benefits and Disadvantages of Equity 33
Making Your Search for Investors More Efficient 35
The Problems with Conventional Wisdom 36
vii
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viii CONTENTS
CHAPTER 3
The Solution: A Strategy That Works 39
An “Inefficient” Market Defined 39
A Strategy That Works 41
Build a Capitalization Strategy 41
Focus on Management, Not Documents 44
Budget for the Financing Program 47
Anticipate Due Diligence 49
Build Relationships with Prospective Investors 52
Line Up Precommitment 54
Aggressively Manage Database Development 56
Go Directly to Qualified Investors 58
Sell 64
Manage the Close 68
Dreamers and Dream Makers 71
PART TWO
UNDERSTANDING THE ANGEL INVESTOR
CHAPTER 4
Alternative Sources of Capital 77
The Impact of Economic Trends on the Accessibility of Capital 77
Alternative Sources of Capital and How They Affect
Early-Stage Investment 80
Corporate Investment and Strategic Alliances 80
Lease Financing 81
Licensing 81
Franchising 82
Research and Development Arrangements 82
Venture Capital Firms 82
Cash Management and Tax Strategies 83
Private Placement (Exempt Offerings) 83
Government Financing (Loans and Grants) 83
Bartering 84
Commercial Finance Companies 84
Banks 85
Initial Public Offerings 85
International Sources of Capital 85
Employee Stock Ownership Plans 85
Management Buyout 86
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Contents ix
Incubator-Based Financing 86
Asset-Based Loans and Factoring 87
Self-Finance 87
Community Development Corporations 87
Small Corporate Offering Registration 88
Business Angels as the Best Source of Capital, Especially
for Early-Stage Investment 89
The Appropriateness of Your Venture for a Direct,
Private Placement 90
Stages of Development Defined 91
Professional Venture Capital as a Funding Resource
for Early-Stage Companies 95
Comparison of Angel Investors with
Professional Venture Capitalists 97
Professional Venture Capital: Help or Hindrance
to Your Funding Success? 102
CHAPTER 5
Angel Capital in America: A Study 105
Introduction 105
Methodology 105
Results of the Study 106
Concluding Remarks 113
CHAPTER 6
What Do Private Investors Look for in a Deal? 115
The High-Net-Worth Investor Market 115
The Informal, High-Risk Investor Profile 118
Advantages and Disadvantages of Direct Venture Investing 121
The Private Investor’s Criteria 122
Common Reasons Why Angels Reject an Investment 126
Variations in Preferred Level of Involvement
after Investment 127
How Angel Investors Can Help Beyond Capital 129
Private Investor Motivation 130
The Allocation Decision 134
CHAPTER 7
Types of Private Investors 141
Introduction 141
The Value-Added Investor 143