Editor's note:
Be sure to also check out the interview with Guy Kawasaki.

Gerald Benjamin is a senior managing partner of International Capital Resources, a San Francisco-based firm that specializes in reaching private investors for venture capital opportunities. He is also the publisher of The California Investment Review and founder of the Private Investor Network, a nationwide private investor group.

His book Finding Your Wings, with co-author Joel Margulis, is a virtual bible of angel investing. It discusses how to locate private investors. He recently took time out from a conference in Boston to answer these questions.

What is angel investing?

Gerald Benjamin: The angel investor market is very large, around $30 billion a year (more than double the size of the venture capital market). There are a lot of startups out there that have used up their own money, spent money from family and friends, and can't qualify for bank lending or venture capital. They need funding from private individuals--from angels--to keep going.

Don't venture capital firms fund startups?

Gerald Benjamin: Venture capital firms have become more like money management firms. There are fewer of them and they tend to gather larger and larger pools of money. As a result, the size of their investments has increased, often into the range of a few million dollars. That tends to leave seed stage companies behind.

How much do entrepreneurs usually seek from angels?

Gerald Benjamin: Anywhere from $150,000 to $1.5 million, which is all they need when they start up. If an entrepreneur seeks early stage venture capital, he is going to raise more money than he probably needs and will give up a bigger stake at a lower valuation. That's the attraction of dealing with angels: an entrepreneur raises less money but they keep more equity.

A lot of entrepreneurs don't like to raise money. They like to write software code or work on a product, but raising money, selling yourself, is often viewed as an undesirable activity. But the most significant difference between a successful startup and a failure is that the successful company learned how to raise money.

Who is the typical angel?

Gerald Benjamin: There is no typical angel. They vary in background and what they want out of an investment, so it's really not useful to develop macro descriptions of investors. Right now there are about 300,000 active angel investors, but the potential pool is much larger. There are about two million with the discretionary net worth to make angel investments.

We hope this conference [Angels and Revolutionaries]--and others like it--will educate these wealthy people about angel investing to increase the number out there.

Why is this market attractive? It's a lot easier for wealthy people to invest in stocks or Treasuries.

Gerald Benjamin: Because of the potential. The real excitement here is what we call pre-IPO (pre-initial public offering of stock). The only way to make $1 million to $5 million with $100,000 is to get involved in a pre-IPO. A lot people don't because they are worried about the risk but there are ways to manage and hedge the risk to 25 percent. And if you hit a home run 2 out of 10 times, the returns can be significant and more than make up for those risks.

What are the three things an entrepreneur should ask before they seek angel investing?

Gerald Benjamin: First, you should ask, 'Is my company financable?' in terms of its business plan, its valuation, the competition it faces and a host of other factors.

Secondly, ask 'Am I financable?' Do you have a history of legal problems or failures or other issues that raise red flags? Do you have the skills to make the company work?

Third, ask 'Is the risk financable?' If a deal's too risky, an angel won't do it. Investors have told me that they lost money when they got caught up in the entrepreneur's enthusiasm without really evaluating the investment.

There are a number of Web sites that are trying to match entrepreneurs and angels: Is this a useful approach?

Gerald Benjamin: We found the total amount raised by Internet matching services last year was $44 million. That's a drop in the bucket. We're finding that investors are not using the Internet to find deals but to research companies. Sixty percent still rely on families, friends and associates to refer deals to them. That could change in the future, the Internet could become more important, but right now entrepreneurs can end up wasting a lot of time when they could be developing a plan to get money in a more realistic way.

It sounds like you're trying to educate entrepreneurs about how to find angels and educate wealthy people on how to invest in entrepreneurs. Is there a large disconnect between the two groups?

Gerald Benjamin: There is and that's the opportunity. The entire economic structure of the country is changing as we move from a labor-based manufacturing economy to a knowledge-based entrepreneurial economy. Ten years ago everybody was working on their resume to get ahead. Now everyone seems to have a business plan in their drawer. What they need most of all is financing. They key is to bring these two groups together and feed this economic movement.

Be sure to check out the interview with Guy Kawasaki.

Angels & Revolutionaries was presented by:



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