Finding cash for your business: entrepreneurs who are shut out by bankers and venture capitalists can stay in the game by finding alternate sources of financing

Black Enterprise, Feb, 2005 by Donald Jay Korn

In 1999, though, a magazine article about Uncle Wiley helped attract the attention of a winged backer, a New York financier who prefers to remain anonymous. "Before I received the money," says Mullins, "I worked with this angel on strengthening my business plan." In effect, he repositioned the company.

"We sell ingredients that can be added to foods such as collard greens, sweet potatoes, and kale," says Mullins. "Our products bring out all the flavor of such foods so you don't have to add bacon or other high-fat items. Therefore, my new business plan treats Uncle Wiley as a wellness company, a theme we carry through on our Website. This is a much more attractive concept for investors."

The angel has a 10% equity stake in the company and receives dividends on those shares. "He doesn't try to tell me how to run the business," Mullins says, "although he has put me together with other influential people, which might lead to more financing in the future. I send him regular reports to let him know how we're doing."

Uncle Wiley, Mullins reports, is doing just fine. "Because of the angel financing," he says, "we were able to expand our product line, repackage our products, and launch a massive public relations campaign. We're now selling at Wal-Mart Supercenters, in all of its districts, and we're expanding in the food service industry. Uncle Wiley has become the largest ethnic spice brand in the country."

"Your typical angel is a person who has made money as an entrepreneur and wants to reinvest some of it to help new companies succeed" says Dan Mitchell, a consultant to entrepreneurs in New Haven, Connecticut. "Sometimes, they want to take a hand in running the new company. Typically, angels look for a solid market, good management, and a sound business plan."

According to Mitchell, angel investments are often in the $1 million to $3.5 million range but they may be much smaller. Terms vary considerably from one transaction to another. "There might be straight equity deals," he says, "with the angel receiving common stock, or the angel might get stock options. In some cases, the angel might make a loan, which calls for repayment, and also receive some equity in the company. There's a lot of flexibility in the way these arrangements are structured." In the end, though, angels want to fly away with returns far in excess of those from safer investments.

"Generally speaking," says Mitchell, "angels are looking for annual returns of 16% or more with a payout within five years. That payout could come from a public offering or an acquisition by another company. If it's a family business that the owner has no intention of ever selling, an angel might not be interested."

Mitchell tells of one entrepreneur who came to him with a company that was barely in business--about $25,000 in annual sales. "He wanted $1.5 million in financing. I knew of an investor who was interested in this business area--homeland security--so I arranged a meeting. They negotiated for about six weeks before coming to terms. Ultimately, the angel agreed to invest the $1.5 million, with $250,000 upfront. The rest was scheduled to be paid according to a performance contract."