Angel investors and other small business capital sources

Blasingame’s 3rd Law of Small Business states, “Its redundant to say ‘undercapitalized small business.’”

There are two primary reasons this Law is true:

1. Unlike big businesses, small businesses typically have only three sources of capital: a) retained earnings (profits left in the business); b) direct investment, usually by the founder; and c) debt, usually from a bank.

2. Everyday one or more elements of a small business are screaming for funds to increase the company’s competitive advantage.

Even very successful small businesses are undercapitalized. In fact, ironically, the more successful a small business is, the more undercapitalized it will likely be. If a business is not growing, it needs capital to achieve growth. A growing business needs capital for R&D, upgrading technology, acquiring new product lines, funding accounts receivable and inventory that increase with sales growth – the list is long.

For most small businesses, the lion’s share of capital comes from retained earnings and bank debt. However, other than the founder’s investment, direct equity capital is less likely. But when outside equity is acquired, the next most likely source is from angel investors, which has become an increasing direct investment option over the past few years.

An angel investor is typically an individual who has money to invest and, instead of putting all of it in the stock market, he or she will allocate a portion to invest directly into a business, which could be either a start-up or a going concern. More recently, angel investors have formed regional consortiums to aggregate their investment dollars in order to spread the risk and make sure that they don’t make the mistake of under-funding a venture.

Most people have heard of venture capitalists (VC), the big dogs of entrepreneurial investment. Angels are sort of mini-VCs. The big difference is the level of funding and, in many cases, the closeness of the relationship with management; angels will be more likely to be geographically and emotionally closer to their recipient than a VC. The big similarity is that both anticipate an exit strategy where their capital – and hopefully a profit – are returned. This last point is the primary reason why most small businesses are not candidates for any investor capital, since the typical small business founder expects to run his or her business forever and perhaps hand it off to the next generation.

Recently, on my small business radio program, The Small Business Advocate Show, I talked about how angel investors choose investment candidates with Tim Berry. Tim is the world’s leading expert on business planning, founder of Palo Alto Software, an original member of my Brain Trust and my good friend. Tim is not only an angel investor, he is a member of one of those angel consortiums mentioned earlier. Take a few minutes to listen to what Tim told me about his experience and this fascinating process.

3 Responses to “Angel investors and other small business capital sources”

  1. 4
    Jim Blasingame Says:

    First, you need to consult with an intellectual property (patent) attorney to secure your idea/prototype either with patent or trade secret strategy. Second, unless you know how - and have the ability - to mass produce your machine, let your attorney help you create a licensing strategy and find the most likely manufacturing/marketing organization to build and take your idea to market. The smartest inventors make their fortune by leveraging their inventions through licensing. Good luck.

  2. 3
    Frederick W. Benyo Says:

    Dear Jim,
    I am developing a means to tap gravity to produce a circular motion that can run an electric generator. I have already built a prototype that goes what I refer to as one cycle. The Chinese developed gun powder which launched early projectiles. This advance was also an early version of the power stroke in an internal combustion engine. I have discovered what amounts to the power stroke of the gravity-powered generator. I need help; both financial and business. If I can successfully build the generator it will be worth millions for years to come. I have the idea but I’m not a business man. I need a partner or partners.

  3. 2
    BestSeller Articles | BestSeller Articles Says:

    [...] example place here: Angel investors and another diminutive playing top sources | Small … Share and [...]

  4. 1
    Tim Berry Says:

    Thanks for this post Jim. The angel investment group is a good idea, a good investment, and a lot of fun. I’m pleased with the investment the group made, taking me along as part of it. I’m looking forward to doing it again next year. Tim

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