Most business owners looking for capital know that traditional funding from banks is now much harder to come by and increasingly expensive. Few of us have friends and family members who can collectively lend above the £100k mark and most businesses simply do not require the level of investment that attract the venture capital funds (£3m plus). This leaves angel investment as the optimum financing route for the vast majority of UK small businesses who need funds for growth.
What does an angel look like?
Many business angel investors have previously founded and owned a small business so are well positioned to add considerable value. They can utilise their own network of contacts for the benefit of their investment and also bring to bear their own area of expertise such as technical, marketing or financial.
Investors usually stop short of becoming involved as part of a management team. Instead, investors usually take a structured approach to spending time with the investee, often meeting on a regular basis and being available to help when needed. They are usually very reasonable people with experience as well as cash, looking to get involved with a company that has good prospects and is in a sector that is of interest to them.
What kind of deal are they after?
Quite simply, a fair one for both parties. An angel is investing his or her own capital into the business and wants a return commensurate with the risk. This means that they would like a meaningful share of the equity but not a share so large that it would serve to demotivate the current owner(s) and management. There are a variety of ways that a deal can be structured in order to accommodate changes in shareholdings as the company develops.
Angel investment is suitable for established businesses as well as start-ups and early stage businesses. The perceived risk from the investor’s point of view will depend on the what stage the company has reached.
So would my company be suitable for angel investment?
Business angels are busy people. They need to get excited by an investment opportunity at an early stage but before making that final investment decision they will need to see a well-prepared, well-presented and fully developed business plan. This does not mean that they want to wade through reams of figures and technical data. The business plan needs to be concise and compelling but also needs to show that all the obvious questions have been considered and addressed.
Business angel networks work in different ways. Typically a full Business Plans should not be sent to potential investors until you have ascertained their interest in the project. A well-written Business Summary is sufficient to establish that initial interest and the business plan is then available to provide a more detailed analysis and reinforce the credentials of the management.
The aspects of a business that will be of particular interest to an investor are:
People
Few early stage businesses have complete management teams and entrepreneurs who can recognise their weaknesses as well as their strengths are well placed to raise investment. Angels will be looking for someone that they can trust. As in every aspect of business, human chemistry is all-important. An entrepreneur who is overly defensive or hostile to ideas that are not his own will not get far with an angel investor.
Strategy
Is the strategy the right one? Would a trade alliance or licensing deal be best? Any viable options should be considered in the business plan. The plan must contain a commercial proposition which will provide an eventual profit for the investors or, as a minimum, sufficient profit to pay the interest and repay the principal on a loan. However, not all plans need to be unique as many “me-too” businesses are established to take advantage of a niche or to stake a claim for a share of an existing market. The business plan must set out the key factors that determine success or otherwise of the business. In addition, the entrepreneur should be prepared to monitor these factors and not be afraid to set out the risks. If an entrepreneur does not recognise the risks it may be that they do not fully understand their own business or they are ill-prepared to manage those risks adequately.
Financial awareness
Potential investors will want to see that the management are able to plan ahead and understand cash flow. They will also want to see that the level of investment being sought is underpinned by realistic projections. What is the money going to be used for? Is it going to be enough if sales fall short of projections? Is it going to be used for future growth rather than patching up a poor balance sheet?
Unique selling points
This should be readily understood and give a degree of confidence that all the hard work and cash investment will not go to waste if a large competitor can easily replicate what the business is selling. A patent or other intellectual property right where applicable will give all shareholders a great deal of comfort.
Exit
Investors will not be attracted to a businesses that is effectively a lifestyle business for the entrepreneur. If the entrepreneur is looking for long-term employment and remuneration until retirement then investors will be wary of being locked in with no way of realising their investment.
It may be difficult for an entrepreneur to imagine selling their business when they are just starting it. However, most investors are looking for capital gains rather than a dividend stream so will want to know how they will make their profit. In many ways the actual form of exit is less important than the principle that there will be an exit at some point – generally within three to seven years. The most common form of exit is a sale of the business to another company but there are other routes such as a listing on a stock exchange (such as PLUS, AIM or the LSE) a management buyout or a share buy-back.
So how do I go about finding an investor?
Arranging investments is a category of regulated activity which can only be carried out by firms authorised to do so by the FSA. Direct approaches to potential investors can be a criminal act and result in the individual making the approach becoming personally liable for any losses incurred by the investor. It is essential that the individual approaching a potential investor directly has received certain certifications from that investor before the approach is made. The FSA seeks to protect both companies and investors. It does this by regulating the way in which financial service providers operate, paying particular attention to the integrity, skill, care and diligence with which they are run and to the competence of those people delivering the services. The FSA lays down in some detail the framework within which approaches to investors must operate in order to comply with the Financial Services and Markets Act as well as subsequent UK and European modifications to it such as the EU’s Markets in Financial Instruments Directive. Obligations are placed upon all business angel networks, their directors employees and associates by the wider law, in particular the Companies Acts and the Data Protection act.
Top tips:
1. Take heed of the legal requirements when seeking investment
2. Find a reputable business angel network or corporate finance house that has a track record
3. Ask the right questions
If I approach a business angel network what questions should I ask?
About investors:
- How many investors are in your network?
- Where did those investors come from?
- What sort of information do you hold about them?
- Do you know how many have expressed an interest in my sector?
- Do you know how many would be interested in the stage of development that my business has reached?
- What is the typical profile of your investors?
About the deal:
- Is there any exclusivity or can I go to other networks?
- What happens if I find the funding myself whilst working with you?
About the process:
- Explain the investment process fully, including how do you actually get my business in front of investors?
- Do you produce any marketing materials for me?
- Do you help me prepare my business plan?
- Do you come to investor meetings?
- Do you help with negotiations and valuations?
- How long does the whole process take?
- Is there a time limit on the help that you give me?
About their track record:
- How many companies do you act for per annum?
- How many completions do you achieve per annum?
- What do you class as a completion?
- What are your total funds raised per annum?
- What is the average deal size?
Conclusion
Not every business or business idea is right for angel investment. But for those that can meet the criteria above then getting the right investor or investors on board can prove to be the catalyst needed in order to create a highly successful and valuable business.
Originally written for fundingforgrowth.co.uk.