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the aspects of the early-stage venture investment process”a marked change
from their lackadaisical approach that characterized the late 1990s. In this
part of the book, we pay special attention to sensitizing you to your prepa-
ration for more intense interaction on comprehensive due diligence, aggres-
sive valuation negotiations, stricter investor-oriented deal terms, and
discussions about potential exit strategies because of reduced initial public
offering market activity.
Finally, in the Appendices, we have assembled some stand-alone tools.
The entrepreneur will find a comprehensive How-To Workbook on draft-
ing and presenting an investor-oriented business plan, assembled by one
of Silicon Valley™s most respected business planning consultants. Also in-
cluded is a legal primer on securities laws issues for nonlawyers pertaining
to private placements, and a comprehensive glossary relevant to entrepre-
neurial finance and venture capital investment banking. Last, the authors
have gathered from their own libraries a comprehensive suggested reading
list for those who wish to expand their understanding of the angel capital
topic.
xix
Preface


THE ENTREPRENEUR

Entrepreneurs in need of capital need this book. This book is about initiating
the process of raising capital for companies at earlier stages of development
and for whom traditional financing resources are not available. For the en-
trepreneur who has failed at these traditional sources of financing, Angel
Capital offers a step-by-step formula for reaching the highly secretive and se-
lective market of the private investor, a segment of the investor market that
has become a major source of funding for entrepreneurial ventures.
Entrepreneurs include those people raising capital on their own, CEOs
of ongoing businesses looking for nontraditional financing, and owners of
small businesses failing to qualify for loans from traditional sources and
seeking expansion capital to grow their businesses. This category also in-
cludes owners of financially troubled companies who seek capital to reor-
ganize and inventors who desire capital to commercialize their technologies.
Furthermore, the entrepreneurial group encompasses people who have ac-
quired technologies through various research centers and defense conver-
sion centers that look for financing to commercialize those technologies.
Finally, this group includes company employees who dream about starting
their own business.
We present guidelines not only for making a deal financeable, enabling
entrepreneurs to evaluate the workability of their transaction, but also for
developing a capitalization strategy for the funding process uniquely suited
to the angel-driven, private placement transaction. Entrepreneurs must learn
to efficiently and conscientiously manage the increasingly demanding, ex-
hausting process of raising money. We have tried to define the problem and
offer nontraditional resources for those companies that merit funding. If en-
trepreneurs don™t know where they™re going in trying to raise alternative
forms of capital for their venture and have no clear road map to point the
way, they will likely end up in a place they did not expect to be and do not
recognize. Angel Capital provides a road map to financing on a path that
otherwise would remain tortuous.
Angel Capital is not a dry compendium of alternative forms of financing
or a public domain directory of out-of-date funding sources available in any
library. It is, instead, a set of tools that enables entrepreneurs to (1) determine
whether private investors are a workable and appropriate source of capital
for their deal, (2) increase their awareness of the private investor perspective
so they can frame an investment proposal with the greatest chance for suc-
cess, and (3) develop a winning strategy to locate, contact, and establish re-
lationships with angel investors.
Few entrepreneurs relish raising capital. Not having been academically
xx PREFACE


or experientially trained for the task, they view it as an onerous activity. Still,
it is an activity inextricably woven into their job description and inextricably
woven into their chances for success. The troublesome task of raising capital
is simply inescapable. Angel Capital analyzes the problem, then presents
strategies for addressing it. But more important, the book provides entrepre-
neurs with tools for articulating their vision, enabling them to move forward
in the private market, furnishing contacts with which to begin their search
for capital. However, too often the entrepreneurs are ill-prepared, not hav-
ing built their management team, prepared for valuation and due diligence,
or written their business plan. In a word, they have not developed a capital-
ization strategy. This book presents a workable capitalization strategy.
For entrepreneurs, Angel Capital also provides protocol on how to
cost-effectively begin developing their own proprietary info-base of high-net-
worth individuals. The book contains a directory to the major resources that
have resulted in substantial investments, plus a complete state-of-the-art syl-
labus on writing and presenting your business plan. In addition, the book
contains exhibits that entrepreneurs can use in educating the rest of the play-
ers in their company.
Entrepreneurs must understand how different the process is for ap-
proaching the private investor. They must know where they are in the sales
process”whether prospecting or screening investors, getting ready for a first
presentation, or doing due diligence on the investors™ ability to invest. They
must know where they are in the transaction process”whether going
through the negotiation process and structuring the transaction, completing
the transaction with attorneys and accountants and other financial and legal
advisers, or managing the relationship with investors after they have invested
money. In the maze of emotion, complexity, and hard work, they can
get lost.
Finally, this book will help the entrepreneur become a more informed
consumer of financial intermediary services. Once entrepreneurs have ex-
hausted their personal network, reaching out to the private market can be
time consuming and expensive. People starting ventures haven™t the luxury
of time, especially when they are without intellectual property protection or
significant market lead. Nor do they usually possess the requisite collateral,
cash flow, or assets to sustain an open-ended funding program.
Finding private investors is all about building relationships with self-
made millionaires, 90 percent of whom are worth between $1 million and
$10 million, people who may have owned their own businesses, and are suc-
cessful because they know what to invest in and wish to broaden their in-
vestments. This book provides resources and contact information so people
can get started in the process of financing their ventures on their own more
efficiently, bestowing on them some of the most powerful tools they will
xxi
Preface


need, while saving them thousands of dollars in costly mistakes and unnec-
essary fees.
Because private investors prize their privacy and because they do not
have to invest”as do professional investors, fund managers, and bankers”
the traditional models and methods of searching for financing simply will
not work in penetrating this market. Books presently flooding the mass mar-
ket and business literature advocate models for accessing professional ven-
ture capitalists, venture leasing, or Small Business Association loans, but
these approaches will not help in accessing the private investor. So the entre-
preneur has to understand the private financing process, a process com-
pletely different from that of applying for a loan, or seeking out professional
venture capital or funds from professional money managers, who are paid a
fee to manage the institutional money. Angel Capital gives valuable insight
into the investor™s motivation, preferences, and expectations. In their own
words, these investors provide a set of guidelines on how to approach them
in ways that won™t run afoul of what is legitimate and appropriate.
This personal testimony by the investors themselves regarding what the
active private investor looks for in a deal allows the entrepreneur to know”
without wasting time pursuing the wrong investors”whether his or her ven-
ture meets crucial investment criteria. If the venture does meet the criteria of
particular investors, this book becomes a valuable resource as the entrepre-
neur proceeds to search for them, stimulate their interest, and establish con-
tact and build relationships with them.
The capital-raising process cannot be successfully navigated in igno-
rance. This book offers the entrepreneur an efficient means for tapping into
capital and doing so quickly. There is the need for tools”understandable, re-
alistic tools”that will help the entrepreneur, particularly in early-stage ven-
tures, to embark on fund-raising, capital-finding tasks. The defining factor
of the entrepreneur is the ability to raise money. When entrepreneurs can
raise money, they become credible.


UNDERSTANDING THE PRIVATE INVESTOR

This book is also about investors and the process they go through in
higher-risk transactions, a form of investing that allows the investor to influ-
ence the outcome of the investment. This highly selective segment of the in-
vestor market that Angel Capital addresses has become a major source of
capital for these particular types of transactions.
However, this is not a market tracked by economists or written about in
the Wall Street Journal, Fortune, or Forbes. It is, nonetheless, a huge market
by any standard.
xxii PREFACE


This private investor market is, in fact, a principal source of capital, con-
tributing to the financial stability of smaller companies that make up a siz-
able source of the tax base, jobs, and technological innovations in the United
States. Successful investors deliver insight directly into the process of
high-risk, high-return investing. Through them, we have captured what con-
stitutes effective ways of reaching out to these types of investors. A sizable
percentage of the 2.5 million U.S. households comprising this market are
prospective targets for early-stage deals seeking financing.
Included in the private investor category are, first, the high-net-worth
private investors who choose a target of interest in companies operating at
particular stages of development and in industries with which they are fa-
miliar. There are also the fund managers and managers of venture capital
funds who must screen thousands of deals a year to identify those that the
firm will invest in. Fund-raisers raising their own funds or trying to put to-
gether a pool of money to invest would also fall within the category of pri-
vate investor.
As we have said, little information exists on direct investing, an esoteric,
idiosyncratic arena in which high-net-worth private investors choose a tar-
get of interest in companies operating at the stages of development and in in-
dustries with which they are familiar. Moreover, as we have likewise
mentioned, private investors prize their privacy”a major reason for their in-
terest in this arena in the first place. Through the research we have provided
here, entrepreneurs can learn to appreciate the private investors™ perspective.
Private investors, after all, are just that”private; by design they are dif-
ficult to reach. They safeguard their privacy, expressly avoiding any form of
solicitation. Moreover, these private investors do not have to invest. They in-
vest with caution because they are risk-averse. But they also invest with a
broader range of criteria beyond internal rate of return and the return on in-
vestment normally associated with the institutional or professional investor.
These are distinguishing characteristics. Furthermore, investors are, in the
words of one of them, “very smart” and appreciate those who deal with
them honestly and straightforwardly, and who understand what they are
going through.
No other resource currently available comprehensively covers what
these particular investors look for, nor does any other resource contain criti-
cal information dispensed by the investors themselves on what they are look-
ing for in an investment and just how they prefer to be approached.
Neither the challenge nor the problem is new. But the formulation of
our strategy is. This so-called inefficient private placement market seems un-
organized. International Capital Resources (ICR) and the authors have pen-
etrated this huge but hidden, misunderstood market. The authors have
placed on the reader™s plate a meaty analysis of angel investors as alternative
xxiii
Preface


sources of capital”what they look like and what they look for in a deal. But
most important in looking at the private investor is the typology, a review of
the different types of private investors. Nothing like it has ever been com-
piled before.
Angel Capital is about our experience in creating and qualifying one of
the largest private investor networks in the country and about what works
and doesn™t work. This book is about our experience in working with more
than 500 entrepreneurs a year. It™s about our experience in building a pro-
prietary database of private investors, engaging them in conversations, and
in arranging their presentations at forums over the past few years and con-
ducting research on their criteria, expectations, experience, and preferences.
It™s about bringing to bear our experience in penetrating this highly lucrative
market for entrepreneurs seeking capital.
Finally, Angel Capital is important for macroeconomic reasons: Larger
companies are reducing their workforces, not creating jobs. But successful
early-stage companies hold the promise of technological advancement and
the increasing competitiveness of American industry. Such companies also
possess the potential for jobs in our recessionary and recovering economy,
both nationally and, particularly, regionally. Where do these companies go
when banks have turned them away? Where do these companies go when
they don™t have collateral and cash flow? The Small Business Administra-
tion™s lending practices are restrictive, and the venture capital industry has
moved out of early-stage investing for economic and demographic reasons.
Private investors have stepped into the breach, attempting to fill the
void. Thus, Angel Capital debunks the misconception that the venture capi-
tal industry is the primary source of capital for these early-stage deals.
Because of a shakeout in the industry, large funds have resulted. Large funds
must make large investments in order to put their money to work. Moreover,
the compensation structure in the venture capital industry is such that the
funds are rewarded for the money under management: One to three percent
of the money under management is paid to the general partners. So not a lot
of economic incentive exists to raise a small fund, nor is there a lot of time to
do so. From the venture capital industry™s point of view, it seems better to
work with a couple of institutional investors with a couple of large deals
than it is to work with scores of smaller investors or scores of much riskier
entrepreneurial ventures requiring nurturing to develop the business.
Angel Capital is not a dry textbook sporting different financing methods
that have no applicability. It offers an inside look at the emergence and mak-
ing of a capital market that holds the prospect for the financing of people™s
dreams. This book is not designed as an encyclopedic, shelf-bound dust col-
lector but rather a useful manual, crafted solely to benefit entrepreneurs in
planning, managing, organizing, executing, and monitoring the effectiveness
xxiv PREFACE


of what they are doing and how they are doing it, where they are and
whither they are tending, as they attempt to penetrate one of America™s
largest capital markets.
The entire process of private transactions is covered, from investors™
developing the initial deal flow through the harvesting of returns. As Warren
Buffett has declared, what counts is not the size of a motor but its degree of
efficiency. This is a book that efficient entrepreneurs will want nearby in this
new millennium.
Acknowledgments


e are deeply grateful to the very best of literary agents, John Willig,
W Literary Services, Inc. of Barnegat, New Jersey, who connected us to the
people at John Wiley & Sons. We thank Bill Falloon at Wiley for his support
and cooperation. We also wish to acknowledge the superb contribution
made by William D. Evers, Esq., Attorney at Law, San Francisco, California,
for his “Legal Primer on Securities Law Issues for Nonlawyers.” Also, we
recognize the excellent “Manual for Drafting and Presenting an Investor-
Oriented Business Plan” prepared by consultant Charles Roedel of Roedel
and Company, San Jose, California.



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