Since we were a seed stage company and the venture capitalists all but have gotten out of the venture side of early round financing, we decided to raise money from angels. This is sometimes referred to as "friends and family" money and to some degree it is. But unless Uncle Joe has very deep pockets and an undying love for you, you had best start networking.
Now there is a fairly wide quality gap in the angel community on four axis.
- knowledge of investing in seed stage companies - you will find through your networking many angels who have invested multiple times in startup companies and several who have run startup companies. These people are smart money. They know what challenges you face, they understand risk, and most likely they will allocate additional investment for when you need it later (known in the business as "dry powder"). These people can help you tremendously. There are others who have not invested much before and are trying it out, or are family members who believe in you but don't necessarily understand the risk. These people will also help you because they can fill in a round (help get you to the total capital you need). Be careful to explain the risks to this second group of investors, walk them through the model, etc. DO NOT TAKE MONEY from anyone in the second group who wishes to be actively involved with your company. That is a recipe for disaster.
- knowledge of your space - Try to find at least one or two angels who are familiar with the market you're going after. They can give you sage advice, help test your hypothesis, and connect you with people who can help move the business along (like prospects :)
- reputation - Getting angels to invest is the same as selling product. In this case the product is most likely you if it is a seed stage deal. You have to generate demand. One way to do this is convince someone well respected in the angel investing community to invest. If they see value then others will see value by association. This will help you close the angel round and will later benefit in helping to close a VC round.
- cash - This is somewhat tied to number 1 but with the caveat of available liquid resources. Some people just have more money than others. Hopefully the people you find with the fat wallets are also the knowledgable investors. Having an unknowledgable investor in with a lot of cash will lead you down the disasterous route at the end of point 1. They will likely want to get involved with your company. Trust me, it will not end well.
Nobody said it was going to be easy. But capital is paramount to success. One way or another you will always be raising capital, be it from investors or customers. Have fun with it, build relationships with people who can help get it done, and go conquor the world!