Angel investment - how to secure business funding
Businesses looking for funding face a number of challenges in the current climate. Credit is becoming increasingly hard to come by and debt finance, which was once an attractive option, is now an expensive burden. Businesses left struggling to find working capital or replacement to bank debt can instead turn to the rising prominence of angel investment as a viable alternative. Here are some top tips to help steer them through this sector:
1) Put in place a strong management team
Few early stage businesses have complete management teams and very few can claim to hold all the skills required to maximise the potential of a business. Entrepreneurs who can recognise their weaknesses as well as their strengths and plan accordingly are well placed to raise investment.
Top tips:
- Consider what skills you and your existing team have and what needs to be brought in
- Be broadminded about your relationships with employees – putting someone on the payroll is not the only option
2) Create a business plan identifying the strategy
A solid business plan that identifies the strategy is crucial. The plan must contain a commercial idea which will provide an eventual profit for investors or, as a minimum, sufficient profit to repay the interest and the principal on a loan. However, not all plans need to be unique as many ‘me-too’ but better businesses are established to take advantage of a niche or to stake a claim for a share of an existing market.
Top tips:
- Always have a business plan
- Only include as much within the business plan as is necessary to keep you on track and to give investors a clear idea of where you are taking the business and how you are going to get there
3) Determine a sensible valuation of the business
Early stage businesses are notoriously difficult to value. One rule of thumb is: a solid business idea alone, £10,000; a solid business idea with a reasonably presented business plan, £50,000; both of the above, plus a good management team with relevant CVs, £250,000; all of the above, plus a sale - any figure upwards of £500,000. A perhaps better approach is to apply the rule of thirds, with the valuation split between the inventor, the management team and the investment.
Top tips:
- Be realistic
- Make sure you can justify the valuation
- Don’t be too greedy – remember that if you fail to secure any funds you may not have a business that can go forward
4) Define the unique selling points (USP)
Aside from coming up with a compelling business proposition, the entrepreneur must ensure that nobody else is offering exactly the same product or service or have a particular USP which makes it different and potentially more profitable than competitors. It is then necessary to consider how easy it would be for another business to replicate it, assuming that it is not patented.
Top tips:
- Research the market
- Research the competition and put yourself in the mind of the competition to figure out how they will react to you entering the market
5) Have an exit plan
Businesses that are a lifestyle plan for the entrepreneur often find it difficult to attract investors. One example is a business that will provide the entrepreneur with long-term employment and remuneration but which they will want to continue with until retirement. However, in these instances, a secured loan may still be viable. Having a well thought through exit plan is therefore a key element of obtaining investment. In many ways, the actual form of exit is less important than the principal that there will be an exit at some point - generally within three to seven years.
Top tips:
- Always have an exit plan in mind
- Ensure that the route to exit is front of mind when speaking to any potential investor
6) Find an investor
Arranging investments is a category of regulated activity which can only be carried out by firms authorised to do so by the Financial Services Authority (FSA). This must also be done with information authorised by a FSA-approved firm. It amounts to acting for a business with the expectation that they will be introduced to an investor. Direct approaches to potential investors by individuals can be a criminal act and result in the individual making the approach becoming personally liable for any losses incurred by an investor. This is unless the individual has received certain certifications from the investor before seeking investment.
The FSA aims to protect consumers; 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 services.
Regulations under the FSA lay down, in some detail, the framework within which approaches to investors must operate in order to comply with the Financial Services and Markets Act (FiSMA) as well as subsequent UK and European modifications to it such as the EU’s Markets in Financial Instruments Directive (MiFID). Obligations are placed upon all business angel networks, their Directors, employees and associates by the wider law, particularly by the Companies and Data Protection Acts.
Top tips:
- Take heed of the legal requirements when seeking investment
- Find a reputable business angel network or corporate finance house that has a proven track record
For business owners that get it right, the rewards from private investors can be high and, with the backing of cash and experience, they will be in the strongest position to succeed in the downturn.
About the Author
Michael Weaver is Chief Executive of Beer & Partners, the UK’s largest business investment agency. Visit their website here.
Posted May 6, 2009
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