07/25/2010 04:16 pm ET Updated Aug 06, 2011

Finding An Angel Investor: 5 Things You Need To Know

So you have a great business but can't find enough money to take it to the next level? And you just know that if you found someone with good intentions and deep pockets, also known as an angel investor, he or she would see the light and invest in your company -- and everyone would get rich?

It's certainly possible -- and improbable all at once. In this economy, money is tighter than ever, and yet angel investors are out there, forking over their capital and helping startups. According to some estimates, there are at least 140,000 active angels who invest some $20 billion a year in new businesses.

Want to track down an angel investor? Here are five things you need to know.

1. Know where to look.
Universities with entrepreneurship programs are often ripe with angel investors, as are business incubators (and, of course, many universities have business incubators). You should also try your local chamber of commerce, which may know where you should be looking in your area -- like angel investing clubs, for example. Don't overlook asking friends and family, either. You never know who they know.

Yes, this sounds terribly basic, but it's how Eric Schnell, co-founder of Steaz Organic Green Tea Beverages, managed to get funding for his business eight years ago. "It's all about the concept of six degrees of separation," Schnell says. "If you ask enough people you know, if they know anyone that ever invests in startups, eventually you will find your way to the money. We're talking about high net worth individuals or 'family offices' that often manage portfolios of wealthy families in a given city the family may primarily reside in. From my experience, those are the top-tier angels to seek out when you are too big for friends and family but still too small to speak to a private equity or VC group. They can move fast if they want and often are willing to take risks if they believe in the concept enough and personally like the jockeys running it."

2. Show your investors value.
No matter how jazzed you are, your great idea is just an idea and unlikely to be interesting to investors. They will, however, start paying attention (and possibly paying more than attention) once you've invested in your own product or service. If you're convinced you need seed money to develop a prototype, and don't think it's possible to get what you need from your own savings account, friends or family, take heart. It's possible (although still unlikely) to get investors to invest in a business plan, according to Kevin Castello, one of the directors of Baylor University's Angel Network, which provides seed and early-stage investment opportunities for accredited angel investors. But investors, Castello says, really like to see more than an action plan -- they'd like to see some action already taken. In other words, the more you can do on your own, like attracting a customer base or proving in some way that you can mass produce, say, your cookie recipe or toy invention, the better the odds of attracting an angel investor's attention. "Very few angel investing groups are going to invest in an idea," Castello cautions.

And what should be in that business plan? Andy Hasoon, CEO of Milamber, an innovation consulting firm based in London, says your business plan should cover three things: What you are doing (product), why you are doing it (market need), and how you are going to do it (execution). Explain how the business will make money, with documents projecting your estimated profit and loss, a balance sheet summarizing your financial data and projections on your cash flow. "Remember, cash is king," Hasoon says.

3. Angels talk to other angels.
If you screw up badly with an angel investor, yes, there's always another one, but because people know people, you really have impetus to make that first business plan a good one. You don't want one investor telling another that your business plan was originally no more coherent than if it had been written on a cocktail napkin. And angel investors do network, Castello says. "There are actually a number of angel organizations that are part of the Angel Capital Association. Entrepreneurs may not realize that angel groups work together all the time, as do venture capital firms. When the Baylor Angel Network looks at a deal and we are very interested in it, we actually will open the door and help syndicate with multiple other angel groups. A lot of entrepreneurs think, 'You find an angel and they're going to write you one check.' But usually, because of their diversity, they're going to write you one check for so many dollars, and then other angels will write other checks. We routinely cross-syndicate deals across three, four or five different angel groups, so the pool of money will be larger, spreading out the investors' risks."

4. Angels like to get involved.
Meaning, he or she may want to play an active role in your business -- offering suggestions, acting as a mentor or even sitting on your board of directors. This could be a very good thing. If you've attracted someone with deep pockets, this is probably no dummy you're working with. You likely could use their advice. Remember, your benefactor may not be willing to fork over a lot of cash and then just sit back and do nothing.

5. Plan an exit strategy.
You want to make money? Well, so does your angel. The more your business plan can spell out monetary rewards for your angel's investment -- whether it's identifying the potential return of their investment or offering a 5 to 25 percent stake in the company -- the more reason you've given someone to invest in your company. It's even better if you can articulate an exit strategy for the investor. If things don't work out, that demonstrates they won't lose their shirt if you lose your nerve or your customer base. But whatever you do, and however you make the offer to team up with your company, be sure to keep in constant communication with your angel investor. Don't just take the money and run. This is a partnership, and if you treat it that way and are transparent about your plans (and some will insist on that as a condition of investing), odds are, you'll have a happy investor. Last thing you want is for them to gather up their money and fly away.

The original version of this article appeared on AOL Small Business on 7/25/10.