Business angels are an option for firms that know how they want to develop their businesses. These are high-net worth individuals who invest in high-growth businesses. Since they have a business background, they bring more than money, making their own skills, experience and contacts available to the company. They often have a background in the business sector in which they are investing. Angels are essentially looking for a financial return, but they are also interested in involvement in a success story.
This funding source is underused in the UK, probably because the process looks impossibly complex. Contact the British Business Angels Association (BBAA); there are 23 business angel member networks across the country. They act as introducers of business angels to entrepreneurs looking for between £50,000 and £750,000, although investments in both smaller and larger amounts are available.
A typical approach requires the entrepreneur to submit a short business plan to a network. This is assessed to ensure it meets the requirements of the angel investors. Those that are approved would then be offered help to become “investment ready” and to prepare presentations to potential investors. This can often take the form of an event where up to 100 angels hear submissions from perhaps six businesses, presenting for 15 minutes each followed by questions. Thereafter, it becomes a one-on-one between the angel and the entrepreneur to agree a deal.
Fans of Dragons’ Den will recognise the formula. It should be stressed that there are some key differences - notably, one is only interested in good investment practice, whereas the other is after good TV, which is not the same thing. Angels also normally take on roughly 20 per cent of a business, not 50 per cent.
Those who have looked up venture capital are often discouraged by the timescales involved, because venture capitalists want to recover their money in a short period. By contrast, business angels are investing for the longer term - theirs is patient capital.
It is increasingly common for angels to invest as a syndicate. This enables larger sums to be invested and spreads their risk. From the perspective of the investee, a syndicate broadens the spread of expertise and skills available to them from investors.
Initially, there are no charges for the introduction to angels. However, the business angel networks charge a success fee, which is typically five per cent, although this varies between individual networks.
Superficially, business angels look much like venture capitalists, but there are some key differences. The main one is that the angel invests his or her own money, whereas the venture capitalist invests other people’s money. This is not a semantic distinction; it means that business angels will invest at an earlier stage of a business’s life cycle and take a higher degree of risk.
Recent research by the National Endowment for Science Technology and Arts into successful angel investment is instructive. While it views the relationship from the investor perspective, the reasons for success are relevant to both parties. The three key factors in achieving a successful outcome were when the investor had personal experience as an entrepreneur, when the investor focused on an area of expertise and when the investor undertook extensive due diligence.
Unlike other finance, angel investment is heavily dependent on personal chemistry. A fundamental element in achieving a result is for both parties to believe in each other.
Envestors, a London-based angel network, says that there are a number of key reasons why businesses do and do not get funded. The big one is you. Investors back jockeys, not horses, so if your track record is not convincing, you have a problem - and vice versa. In addition, you need a convincing management team and a credible set of financial projections, which offer a significant financial return.
Avoid complexity either in the structure or the product, because if investors don’t ‘get it’, neither will you. Research your market and be ready to prove you really understand it. Have a scalable proposition, such as one that can move into new markets and become global, and have an exit plan prepared so that the investor can see where the money can come from and when.
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