1. Angel Financing: How to Find and Invest in Private
Equity
Gerald A. Benjamin and Joel B. Margulis
Synopsis by Hernan Cortes
Informal, High-Net-Worth Investor Profile
48-59 years of age, male
Postgraduate degree, often technical
Previous management experience; started up, operates, or sold a successful business
Invests between $25,000 and $250,000 per transaction
Prefers participation with other financially sophisticated individuals
Strong preference for transactions that match with technical expertise
60% prefer to invest “close to home”
Maintains an “active” professional relationship with portfolio investments
Invests in 1-4 transactions per year
Diversification and tax shelter income are not the most important objectives; however,
ROI is rarely the only objective
Term for holding investment is 5-7 years
Looks for rates of return from 22.5% to 50%. Minimum portfolio return 20%
Learns of investment opportunities primarily from friends and trusted associates.
However, majority would like to look at more investment opportunities than present
informal referral system permits
Income is $100,000/year minimum
Self-made millionaire
Advantages of Direct Venture Investing
No middleman
You can hit a “home run,” unlimited upside potential
Satisfying experience
One of the few investment arenas in which the investor can influence the outcome of the
investment
Private Investor Criteria
Exciting, fun (it is also fun to make $$)
Proprietary advantage or unique technology
www.conquistador.org

2. New features recognized competitors don't have that result in significant barriers to
competition
Cost advantage
Something investors can understand (not too complex)
The possibility of new markets
Potential for fast growth and share of the market
Potential for ROI, 5-10 times investment with solid financials, BS, IS, CFS, and
assumptions spelled out
History of profitability, if applicable, or a borrowed track record I Not just an invention,
but a plan for profit
A management team with the following attributes:
Perseverance -Decency
Competence
Track record
Personal financial commitment of their own net worth
Burning desire to succeed
Comfortable with level of active/passive involvement required
In their price range (affordable loss)
Geographically close (within 300 miles)
Allows for incremental funding based on performance
Allows for due diligence
Must have a clear exit strategy
Investor Motivation
Improve self image, self-esteem, and recognition
Alleviate concerns--help others
Obligation to give back
Get “first crack” at next high-rise stock prior to IPO
Habit, addicted to the high-risk “rush”
Fun and exciting, the “joy of giving.” “You never know how much you know until a
small company turns to you.”
ROI 30% minimum
Desire to take charge of the stock selection process more directly
www.conquistador.org

3. The Allocation Decision
Match investment strategy
Stage of life
Risk posture
Part of business cycle of interest (experience)
Relative attractiveness of participatory investing
Net worth, income, liquid financial assets on hand
Typology of Angel Investors
Value-added investor
Deep-pocket investor
Consortium of individual investors
Partner investor
Family of investors
Barter investor
Socially responsible private investor
Unaccredited private investor
Manager-investor
Typology: Value-Added Investor
Very experienced investors and former investment bankers and venture capitalists
Storefront venture capital firms
Short diligence cycle, require business plans
Make multiple investments
Want to help grow business and have fun doing so
Lead investor. Searches out investment opportunities and makes an independent decision
to invest and often suggests investments to others
Very strong network of coinvestors whom they leverage and who trust their judgment
Become extremely active and involved, however, only for short periods; problem-solver
orientation
Tend toward industry concentrations
Invests close to home
Invests $50,000-$250,000 in either debt or equity
www.conquistador.org

4. Typology: Deep Pocket
Built and sold company
Corporate not technical background
Emphasis on deal structure to mitigate risk
Invests only in what he knows
Prefer that investor(s) hold control, e.g., outside board
People and plan equally important
Can be lead or independent investor. Can search for opportunities, makes independent
decision to invest, suggests investments to others, welcomes leads from respected
colleagues, but always relies on own judgment, and investigation in deciding to invest
Geographic preference
Fun is a factor
Targeted ROI of 50%/year
Some involvement to make a contribution
Open to both debt and equity
$50/000-$100,000 per investment, 1-3 investments per year
Typology: Consortium of Individual Investors
Loose confederation of private, individual investors (unrelated, typically 3-6)
Experience in start-up, running, and selling their businesses
More passive involvement; seek oversight; sounding board role
Will invest in technology and product opportunities, as well as start-up companies
Individuals make their own decisions, may not always invest as a group
Extensively connected with "deep pocket"-type of angels with whom they coinvest or to
whom they refer deals
Seek some protectable advantage
Invest $50,000-$500,000
Typology: Partner Investor
Buyer in disguise
Very high need for control
Is trying to build network or has developed some coinvestor relationships
Would prefer acquisition of established company but lacks financial resources
Lead investor who searches for opportunities, makes independent decision, and suggests
investment to coinvestor network
www.conquistador.org

5. Wants to be president
Able to invest $250,000-$1,000,000
Typology: Family of Investors
Family money is pooled and a trusted, skilled family member coordinates investment
activity
Very astute investor, MBA minimum, many Ph.D.'s in coordinator role
Contribute experience, intense involvement for short periods of time
Group investor likely to invest only if there is group consensus
Very common among Asian investors in Bay Area
Invest $100,000-$1,000,000
Typology: Barter Investor
Provides what you would have used capital to buy in exchange for equity
Participative-not passive
Early-stage preference
Offers capital and infrastructure (an incubator model)
Management is most important criteria
Independent investor who relies on own investigation in deciding to invest
Venture must have capability to grow to $10M minimum in 3-5 years
Invests up to $250,000 and frequently supplements with guaranteed line of credit
Typology: Socially Responsible Investor
Nurture capitalist, seeking intensive hand-holding situations
High need for personal interaction, less able to provide savvy business support
Seeks to be associated with individuals with “high values”, Prefers ventures addressing
major social issues
Seeks reasonable ROI while supporting people/ideals consonant with “enlightened”
personal values
Often inherited wealth with extensive investment capability
Referred investor, relies on recommendations through trusted advisors
Typology: Unaccredited Private Investor
Less experienced, less affluent private investor
Looking for a role in earlier-stage situations
Not a patient investor; plans to get money out in 3-5 years
www.conquistador.org

6. Must “really get to know” investee
“Spreads his apples around,” making multiple small investments
Used to invest in real estate, now has a preference for technology
Invests close to home
Has to justify investment to spouse
Typically a referred investor who is primarily influenced by recommendations from a
knowledgeable person
Invests $10,000-$25,000 maximum
Types of Risk
Management risk (Can a cohesive team be formed?)
Product risk (Can it be made to work?)
Market risk (Will the market accept the product?)
Operations risk (Can the product be produced in volume and with quality?)
Financial risk (Can the venture survive with the amount of capital projected?)
Business strategy risk (Can the venture survive changes in the targeted market?)
Hedging Strategies in Direct Venture Investing
Negotiate steep discounts
Never invest at the price/valuation suggested by the entrepreneur
Search for coinvestors early to share due diligence and financial risk
Use other people's money as soon as possible
Expect the unexpected
Learn to live with the disadvantages
Reasons for Syndicating Early
Helps to mediate financial risk
Pulls potential management resources together with similar interests/commitment before
problems occur
Broadens available technical expertise to evaluate deals
Professional Venture Capital Returns on Investment
Total loss 11.5%
Partial loss 23%
Break even 30%
2-5 times investment 19.8%
www.conquistador.org

7. 5-10 times investment 8.9%
10 or more times investment 6.8%
Annualized Targeted Rates of Return
Seed/start-up 60%-100%
Development+ 50%-60%
Management team revenues/expansion 40%-50%
Profitable/cash poor 30%-40%
Rapid growth 25%-35%
Bridge to cash out 20%+
www.conquistador.org