The key to attracting angel investors

As a corporate and securities lawyer for 35 years, now as a professor of entrepreneurship and negotiation, I've worked with many young, technology companies in their efforts to raise capital from angel investors. Almost all of these companies initially thought they could simply present a good business plan to several potential angel investor who they've never met before and get a commitment from each of them to invest several hundred thousand dollars. Those that ultimately raised capital learned the hard way that they had to establish a relationship with potential angel investors before they would invest.

A few of my clients followed my advice and the advice of others and started a year in advance to establish relationships with potential angel investors before attempting to raise capital from them. This took planning and perseverance since most young companies can't wait for a year to raise capital unless they can bootstrap for that period of time.

But, think about it, doesn't common sense tell you that angel investors are not stupid and won't invest unless they have direct or indirect relationships with the companies they will invest in? Every angel investor has many, many investment opportunities. The smart angel investor invests in companies the angel investor knows more about than he or she learns from a business plan. Or, he or she has a friend (usually another angel investor) who has a relationship with the company and intends to make an investment. This is what I mean by a direct or an indirect relationship.

I can't remember a client who raised capital from angel investors who were total strangers. Usually, one of the angel investors had a relationship with the company for a period of time. This investor acted as a lead investor and brought in friends to the deal. The friends trusted the lead investor's judgment because of the relationship he or she had with the company.

So, the key to raising capital from angel investors is to establish a relationship with one or more angel investors so the angel investor can become a champion with other angel investors he or she knows. I know this is easy for me to say and very hard to do when a young company is trying to survive for up to a year while establishing these relationships. But, those who are able to do this, who have dynamite business opportunities, management with experience and business plans that are believable can raise capital from angel investors.