By Richard Ward

      Some angels are devils in disguise. When the subject is money, particularly early stage investment in start-up ventures, the devil is usually in the details.

      Angel funding is often the first investment in a business enterprise that does not come from the founder; it may be called seed capital, startup money or early-stage venture investment.
     
Is an Angel Right for You?

One of the first questions entrepreneurs should ask is whether angel investors are really needed to capitalize the company. Friends and family best know the abilities and characteristics of the founder. If these people have money they can afford to risk, and believe in the opportunity, they can be an excellent source of start-up capital. One obvious caveat: family and friends can be the best—and worst—investors.

      Often, a supportive spouse with a full-time paycheck and good benefits is a better source than angel investment for a startup’s financial support.
     
Costs of Angel Funding

      Traditional angel funding is not cheap. Angels expect high rates of return and rewards for their equity investment. Amounts invested tend to be small, often less than $500,000. This is often just enough cash to develop the first version of an application, prove a concept, produce a prototype or sign the first major account. But, with careful management and reasonable expectations, angels can finance the first step on the road to success.

      Angel investors are usually wealthy individuals who sometimes affiliate with others in clubs or groups. Even in a group, they make individual decisions about whether to invest their money. This characteristic is one difference between angels and venture capital funding. Venture capital investors commonly pool the resources of several individuals to invest in a portfolio of companies, spreading risk with the expectation that not all investments will succeed. Because angels don’t share risks in pooled funds, they are more sensitive to negative cash flows and the need to preserve operating capital.

      No credible angel investor has “extra” money just lying around, waiting anxiously to be placed into the hands of a total stranger. Professional angels can be charming, even likeable; but they really care about making a return on their money based on the risks they perceive. Angels are generally not charitable foundations that invest without reasonable financial expectations.
     
An Angel’s Expectations

      Angels have varied expectations about what they need to determine their initial interest in considering an investment. Most prefer a very concise one- or two-page executive summary, two years of quarterly projections for key financial categories and a SWOT (strengths, weaknesses, opportunities and threats) analysis.

      Pro-forma financial statements should not show a “hockey stick” for revenue and profits. In this too-common model, revenue and profits suddenly skyrocket after a short period of development and start of business operations. Other key danger zones for financial numbers: aggressive revenue per employee and failure to increase service and support expenses when new customers are added.

      Be prepared to answer the angel’s people questions: Who are the customers? Who are the company’s advisers and mentors? Who are the company’s executives and key managers? Human capital is the most important asset of a startup, and without this key element angels will look for another investment opportunity. Angels are initially attracted by a business concept, but will ultimately base their investment decision on their evaluation of the entrepreneur.

      Use numbers! Numbers are critical because they provide a way to project the expectations of financial success and measure current performance. Angel investors know that if an activity can’t be measured, it can’t be managed.
     
Discuss Timing

      Talk about timing with potential angels and, later, with those who invest. When is the money needed? When do expenses start? When does revenue begin? Don’t wait until the last minute; it will take a minimum of 120 days to raise and secure funds, and probably a lot longer.

      Angels tend to invest locally because it’s easier to conduct due diligence and check on management. If local angels invest, expect them to be around a lot to closely watch their investment. Angels also commonly invest in companies or categories where they have prior executive experience. Angel-advisers are not uncommon and can be a bonus benefit for many startups.

      Make absolutely sure you can deal with your angel. Business owners tend to talk about how great things are going to be, but the angel investor knows that there are problems yet to be solved. Angels continuously watch the numbers and evaluate the degrees of risk associated with revenue, expenses and market value. Rest assured, something will go wrong at some time in your relationship, and that’s when angels can live up to their names—or make your life hell.

Richard Ward is CEO of Providence Business Group Inc. (PBGI). The firm advises, creates, funds and operates Internet-based products and business for Fortune 500 companies and its own account. You can reach him at .