Al Nelson went on the third season of ABC’s Shark Tank seeking a $150,000 investment in his Miami-based technology business, EZ VIP. A kind of combination Expedia and OpenTable for nightlife, EZ VIP bypasses the proverbial velvet rope by allowing anyone to go to its website and pre-purchase admission, a VIP table, and bottle service at the hottest and hardest-to-get-into nightlife events. “We provide access and convenience,” says the 27-year-old Nelson.
After submitting three audition tapes, filling out a 50-plus-page application, and presenting his business to producers, Nelson was ready to pitch his business to the panel of five private investors—aka the Sharks: real estate mogul Barbara Corcoran; billionaire Mark Cuban, owner and chairman of HDNet and the NBA’s Dallas Mavericks; technology innovator Robert Herjavec; branding expert Daymond John, founder and CEO of FUBU; and venture capitalist Kevin O’Leary.
The Sharks have a clear goal—to own a piece of the next big idea, sometimes for as much as a 50% ownership stake. Nelson, having netted $90,000 on $250,000 gross in revenues, caused a feeding frenzy as the Sharks made offers and counteroffers back and forth. He had intended to give up a 15% equity stake, but clinched a deal with Cuban and John to receive $150,000 in exchange for 30% of the company. Nelson went with the duo because of the brand value they could bring.
Having a business idea or product that resonates with a potential investor is key to raising capital, says John. “Mark [Cuban] and I were at one of the hottest night clubs in Miami when the Mavericks won the championship. I had clients who were there. They booked a table with EZ VIP two weeks beforehand.”
Like Nelson, other early-stage entrepreneurs seek out angel investors—private high net worth individuals or groups of individuals—to invest in their companies, typically in exchange for equity ownership of anywhere from 5% to 25%. But it’s not just an infusion of cash they want: Business owners also want angels to bring experience and contacts that will accelerate their companies’ growth.
In today’s tight economic climate, angel financing fills the gap in startup capital and early stage financing. About 42% of angel investments were in seed capital last year, reports the Center for Venture Research. In contrast, there was a 48% decrease in seed money among venture capital firms (VCs), according to the PricewaterhouseCoopers/National Venture Capital Association MoneyTree Report. John and his fellow Sharks are part of a larger pool of more than 300,000 angels active in the U.S., funding more than 66,000 companies and investing about $22 billion in total last year. Angel investment activity rose in total investments, up 12.1%, and deal size, up 4.7%, from 2010 to 2011. Deals can range from $150,000 to $1 million, but the average angel deal is about $400,000. By comparison, VCs invested $29.1 billion in more than 3,700 deals, a 5.2% increase in deals from 2010. Last year, venture capitalists invested, on average, $7.8 million per deal.
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