Angel investors may not have wings, but they can be the answer to an entrepreneur's prayers, providing early-stage funding to deliver them from pre-revenue purgatory.
After the friends and family have written their cheques of support for the new enterprise and before the new company is big enough to interest venture capital firms or profitable enough to secure bank financing, angel investors are there to back a great idea.
"The biggest difference between angels and the other institutional options is that it's their own money," said Bryan Watson, executive director of National Angel Capital Organization, a Canadian group that aims to provide education and support to close to 30 angel investing groups in the country.
NACO is holding its Angel Investing Summit Oct. 14-15 in Toronto.
"They can spend it by buying as boat or a cottage or investing in an early-stage, high-growth company. On the venture capital side, they are managing someone else's money."
Money isn't the only benefit that entrepreneurs receive.
Most investments come with a caveat that the investor will be actively involved in the operations.
That means coaching and advice are included. Similarly, the eventual financial payoff – the length of a typical investment is eight years – isn't the only attraction for the angels. Typically seasoned entrepreneurs, they love the thrill of seeing a new idea succeed.
"What I love about is being at the birth," said Blake Witkin, co-founder and board director of Maple Leaf Angels, one of Canada's largest angel investment groups.
"When companies become more mature, more bureaucratic, it's not as interesting as being at the formation stage."
Angels are people with a high net worth, people who have successfully created other start-up companies and understand what's needed to succeed.
Angels can be retired, having sold their enterprises and cashed out, or they can be investors who are still working in other companies.
For example, Witkin is a managing partner in IT company Atra Vision Inc. He has also invested in about six new ventures as an angel, and believes he has a good track record. "All of them are surviving and some are prospering," he said.
Witkin likes to use an ecological image to explain the investment crap shoot: "Ultimately, job creation comes from the creation of wealth and all businesses like all trees have to start as a small seed. Angel financing is the water and the sunshine for those little seeds. And many of them don't make it, hence the risk."
Based in Toronto, Maple Leaf Angels is a non-profit organization established in 2007. The group has 50 members who have invested a total of $5.7 million so far. Every month the group holds a breakfast where members listen to three presentations from prospective investee companies.
If some of the members have interest then Maple Leaf will do some further investigating. Maple Leaf gets about 400 applications for funding every year, with only six or eight chosen to receive investment funds.
While angel investing sounds freewheeling, decisions are not made as fast as the CBC business show Dragon's Den would have you believe.
"It used to be that a sketch on the back of a napkin would be enough to get a cheque from an investor," said Watson. "Those days are gone. There's not much sketch-and-a-dream investing. People are looking for companies with a little bit of traction, a bit of revenue and a great team of people that will lead."
Even after careful assessments of the business plans, the ventures don't always become profitable. For every 10 investments, two go bankrupt, six will allow the angels to recoup their investments and two will deliver the big returns.
Typical investments are in the form of either equity or convertible debt in amounts ranging from $150,000 to $1.25 million.
An investor's exit strategy consists of one of three ways to get money out: an IPO, a merger or acquisition by another company or a dividend once the company has matured.
Angel groups say an extra $5 billion in investments is needed to ease the commercialization bottleneck and help grow new companies. NACO is pushing the federal government to initiate a system of tax credits as incentives to invest.
According to Maple Leaf Angels managing director Rob Koturbash, "fostering entrepreneurship is really what's going to drive us out of the recession because it's not established manufacturing businesses."