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"Business Angels"
(Private Investors in New Enterprises)

by Aaron Kleiner

The most important source of capital for the earliest stage companies is not traditional venture capital but private investors.

William E. Wetzel, President of the Venture Capital Network, a not-for-profit corporation whose purpose is to introduce entrepreneurs to individual venture investors as well as to venture capital firms, in an article entitled, "The Informal Venture Capital Market: Aspects of Scale and Market Efficiency," estimates that "private investors manage a portfolio of venture investments aggregating in the neighborhood of $50 billion, about twice the capital managed by professional venture investors."

Bill went on to say that "by participating in smaller transactions, private investors finance over five times as many entrepreneurs as professional venture investors, 20,000 or more firms per year compared to the two or three thousand by venture firms. The typical angel-backed venture raises about $250,000 from three or more private investors."

For those of you seeking initial investments for your company, I offer the following advice: target as potential angels entrepreneurs who have been successful in your industry or in a similar industry who have sold their company for a significant amount of cash. They have liquidity, can evaluate your product and market quickly, are decision makers who will rely on their gut rather than protracted due diligence. They are successful and probably enjoyed entrepreneurship. In addition, they may have time on their hands and be looking for involvements that are not full time but that leverage their knowledge and experience in a way that again places them in an entrepreneurial setting.

The individual investor will most likely want to invest his or her time and energy as well as their money. They bring a lot to the party. Having been through the wars, they bring stature, maturity, realism and empathy that can't be found elsewhere.

Reprinted with permission from The MIT Enterprise Forum, Inc. of Cambridge. The article first appeared in the "Forum Reporter," Volume 7, No. 3, November 1988.

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