-- ANGEL FOOD

Answer: Angel investors are typically high-net worth individuals and "cashed out" entrepreneurs who are interested in mentoring other entrepreneurs and sometimes get actively engaged in the businesses they back. The Center for Venture Research, at the University of New Hampshire, estimates that angels pump $25 billion into tens of thousands of startups annually.

In the past, angels have typically operated solo. But in a trend that is gaining momentum nationwide, angels are forming groups to pool resources and expertise, generate investment ideas ("deal flow"), and create a formal screening process to pinpoint the most promising prospects.

"Angel investor groups are proving to be excellent partners in filling the funding gap for startups," says Carl Schramm, CEO of the nonprofit Kauffman Foundation, which promotes entrepreneurship. "Angel groups are critical to helping entrepreneurs start and grow companies."

Angel enclaves also help spread the pool of capital outside traditional venture hot spots.

"Organized angel groups are a growth industry and have proven vital to regions with fewer venture capital firms," adds David Rose, chairman of New York Angels. The New York City-based group started in 2004 with 34 members investing $3.5 million the first year. Now the group has 63 members and invests about $9 million annually.

Here are your "must know" tips about finding and approaching angels, from the Angel Capital Education Foundation:

1) Angels are not venture capitalists (VC). Angels invest their own personal funds in a business. VC money usually comes from institutional sources. Angels also back startup and early-stage businesses, while venture capitalists prefer later stage companies. Individual angels invest $5,000 to $100,000, while VC investments go $2 million and up.

2) To attract angel interest, be willing to give up some ownership or control of your business, and be able to show a significant return within three to seven years, and a profitable exit strategy.

3) Seek angel funding when: a) your product is fully developed; b) you've already invested your own money and exhausted other alternatives (like family and friends); c) you have existing or confirmed potential customers; d) you can demonstrate that the business is likely to grow fast and can pass $10 million in revenues within three to five years.

4) Angel groups come in many forms, but generally share these traits: Members help screen firms and commit to a certain amount of investments yearly. Groups meet regularly (often monthly) to hear investor presentations. Member angels decide individually whether to invest in a business or not. Members work jointly to validate plans, statements and entrepreneur backgrounds.

5) While angel group sizes vary widely, the median pooled investment per round is around $400,000. Some groups focus on specific areas, such as technology, but most are open to a variety of industry sectors, including software, medical devices, services and manufacturing.

6) Angel groups typically look for a management team with proven skills and experience; a unique product or service with a competitive edge, large market and a clear, workable plan; evidence that you've invested substantially yourself; potential for a strong return.

7) Once you locate a group, expect a multi-step process that includes an initial application, a "first cut" quick pre-screening to decide if you meet minimum requirements, a full screen that includes one of the member's becoming your champion; a pitch meeting where you present to the entire group; and extensive due diligence.

These resources below can help you identify angel groups and learn more about angel investors:

• The Angel Capital Education Foundation provides educational programs and research for angel investors. The directory of angel groups, is at www.angelcapitaleducation. org/. Click "Info for Entrepreneurs" on the right.

• AngelDeals.com matches entrepreneurs with potential angels. The site offers other helpful information for entrepreneurs as well.

• Angel Investor News covers the field of angel investing each month. The Web site features angel profiles and opportunities for entrepreneurs. Visit www.angel-investor-news.com.

Daniel Kehrer is editor and publisher of BizBest (www.bizbest.com), which provides independent ratings and analysis of nearly 2,000 small business resources in hundreds of subject categories. Kehrer, based in Pacific Palisades, also has worked as a business journalist for 25 years. E-mail questions to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it or send to Daniel Kehrer c/o Daily Breeze, Business section, 5215 Torrance Blvd., Torrance, CA 90503-4077.