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Angel Capital
Founded in 1807, John Wiley & Sons is the oldest publishing company in
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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.
Copyright © 2005 by John Wiley & Sons, Inc. All rights reserved
Published by John Wiley & Sons, Inc., Hoboken, New Jersey
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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
10 9 8 7 6 5 4 3 2 1
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
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
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
ix
Contents


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
x UNDERSTANDING THE ANGEL INVESTMENT PROCESS


The Deep-Pocket Investor 150
The Consortium of Individual Investors 162
The Partner Investor 165
The Family of Investors 167
The Barter Investor 168
The Socially Responsible Private Investor 172
The Unaccredited Investor 174
The Newest Breed of Angel : The Manager Investor 176


PART THREE
RESOURCES FOR ENTREPRENEURS RAISING CAPITAL
CHAPTER 8
Alternative Funding Resources in Accessing Angel Capital 183
History of the Development of Alternative
Funding Resources 183
Overview of Alternative Funding Resources 186

CHAPTER 9
Directory of Alternative Funding Resources 203
Directories, Printed and Software-Based 203
Incubators 204
Entrepreneurial Finance Conferences 204
Investor Education Meetings and Conferences 204
Venture Forums 205
Venture Capital Clubs 208
Offline Investor Networks 210
Online Matching and Search Services 210
Financial Intermediaries 212

CHAPTER 10
Building Your Own Database of Angel Investors 213
Introduction 213
Hurdles 214
Data Entry 217
Backup 218
Cost 218
xi
Contents


PART FOUR
UNDERSTANDING THE ANGEL INVESTMENT PROCESS
CHAPTER 11
The Venture Investing Process 223

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