As some of you may know, I started my career with The NPD Group, which is one of the world's largest market research firms.
One of the things I learned there was that statistics can be easily manipulated. That's not to say market researchers purposefully falsify their research. Rather, what I'm talking about is how statistics can easily be manipulated during interpretation.
For example, I can say that 93% of pet owners prefer brand X. But, if I didn't mention that my sample only included pet owners in the highest income zip codes, my results clearly wouldn't be telling.
But sometimes market research is as clear as daylight. And such was the case when I read the latest statistics from the National Venture Capital Association (NVCA).
The seemingly good news from the NVCA was that the amount of venture capital funding grew 22% from 2010 to 2011.
However, when I dug deeper, I found some deeply disturbing news. Specifically I found that the lion's share of this funding went to later stage companies (companies who have already raise previous rounds of venture capital, have revenues, and are looking to grow further before being acquired or going public).
In fact, the NVCA's numbers showed that in 2011, venture capital investments in seed companies or startups declined 48% versus 2010. Down forty-eight percent. That's huge. And that's terrible. Since it means that venture capitalists are now less willing to bet on higher risk, earlier stage companies.
What it also means is that if you want to raise equity capital, you need to rely more heavily on individual or "angel" investors. While angel investors have always been a huge source of early stage equity funding, they are now more important than ever. Since venture capitalists want to see that you have raised this funding and progressed your business before they'll fund your future growth.
So, how should you decide if angel funding is right for you? Answer these questions:
1. Can you make significant progress with your business for less than $1 million?
While I've seen companies raise more than $1 million from angel investors, the average angel investment in a company is only $338,400 according to the Center for Venture Research.
So, think about your business and figure out if you could accomplish significant milestones for this amount of money. Specifically, you need to accomplish enough milestones to make your company cash flow positive, or enough that shows investors you can execute and that it's less risky for them to write you a larger check.
2. Are you willing to give up equity in your business?
There are still many entrepreneurs and business owners who are concerned about giving up too much equity and/or losing control of their company.
Let me start by saying that capital is the MOST important thing to your business. In fact, running out of capital is the reason why most businesses fail. And with capital, your business gains massive competitive advantages such as the ability to hire better personnel, buy better equipment and technology, etc.
Now, in terms of giving up equity to investors, consider this important yet simple mathematical fact: 100% of nothing is nothing. And without the capital, your company may be worth nothing. As such, it is my experience that a small piece of a big company is better than a large piece of a small company. For example, a 10% piece of a successful company (perhaps a $10 million company) is twice as great as 100% piece of a small company, perhaps a $500,000 business.
Importantly, equity investors want YOU to maintain the lion's share of your company's equity, since they know it will give you the motivation you need to work really hard and make the company a huge success. In general, you should expect angel investors to want 10% to 35% of the equity of your company.
3. Are you willing to kiss a lot of frogs?
The process of raising angel funding (which you can learn to do here) includes a lot of frog-kissing. That is, you need to speak with a lot of individuals in order to find the few that will write you checks.
It can clearly be done, as tens of thousands of entrepreneurs raise angel funding each year, but you will need to invest time and meet a lot of people in order to raise the funding.
Few things are more exciting than building a company from nothing to a thriving enterprise. Doing so nearly always requires a significant cash investment. Unfortunately venture capital firms are no longer making nearly the number of such investments as they once did. But angel investors are. And if you're an entrepreneur seeking funding, you should start speaking with these angels now.