Angels or dragons - who do you trust?

   

Looking for an investor? Better make sure they're an angel, not a dragon.

Most businesses require outside investment at some point in their development. Whether you are a new business needing a cash injection to get started, or an established company looking to launch a new product or move into new markets, attracting investment will be essential to your venture's success.

Yet many businesses miss out because they do not know about all of the investment avenues available to them, or how to approach would-be investors.

The success of the BBC's Dragons' Den programme has thrust the issue of investment into the spotlight, but SMEs are often unaware that the programme represents just one of the options available. Business owners must also remember that this is a TV programme and the real world of private funding is not always as dramatic - or as cruel.

The first priority for companies looking for financial backing is to work out what sources of funding are available. Depending on your size and structure, these may include business angels, venture capital, private equity and even grants.

But identifying the sources of funding that are available is only half the battle. Deciding which source is best for you and presenting your business as an attractive investment prospect is another challenge completely.

Taming the dragons

Thorough preparation for your first meetings will help you to impress investors and achieve the funds that you're looking for. These initial meetings are crucial in another way, because they determine the boundaries of your investor relations and will help define the power-balance between you and your investors.

Your company's pitch needs to be perfect if you are going to encourage investment in your company. Your business plan forms both your pitch and the basis of the agreement with an investor and is therefore essential to the process of attracting their investment. You should get advice from as many sources as possible and make sure that your proposal shows potential investors everything they will want to know about your company.

Before approaching any form of fundraising make sure that your idea has been properly thought through. An innovative idea on its own is not enough.

Planning ahead

Too many companies approach investors with just a concept that they are unable to demonstrate profitability on. Make sure that your plan clearly plots the course to commercialisation so that the investor can visualise the returns on their investment and see their eventual exit from the company.

Potential investors will want to read your business plan before meeting you and this document should not only demonstrate how the success of your business will be achieved, but also the capability of you and your management team to deliver it.

The two main pitfalls in a flawed business plan are insufficient competitive analysis and a lack of information about the previous experience that qualifies you and your team to run the business and execute the plan successfully.

Demonstrating a thorough understanding of the marketplace and your competition will reassure would-be investors. Emphasising your sustainable competitive advantage will show that your business is not just a flash in the pan. This will help to prove that your venture will be able to compete in the marketplace over the course of their investment. This will go a long way towards allaying the fears of potential backers.

Investors want to know that their money is in safe hands - and too many business plans focus on the idea, rather than the team's ability to deliver success.

Financial assurance

It's important to make sure you have some personal financial input - bankers and investors like to see a serious cash commitment. Entrepreneurs who have the confidence and devotion to fund their own business will impress potential backers and show they are dedicated to the project. Investors like to think that entrepreneurs are risking the shirt off their back, as this means they will get the most out of the people they are backing.

Tax relief is available on personal loans to raise funds to go into a business.

Some businesses start looking for funding too early. There's no such thing as a free lunch and it's a good idea to prove your business is sustainable before looking for outside investment. Investors would much rather invest in a tangible working model than a theoretical concept. Above all, make sure that the first contact you have with potential investors goes well. Preparing for the pitch and investor interaction is as essential as preparing your business plan itself.

You should be aware that the investor is looking at you, as much as they are looking at your business. They will be evaluating how you present yourself, how you dress and how you carry yourself, as well as how you take criticism and feedback. A lot of emphasis will be placed on the quality of your management team and the personal chemistry between you and would-be investors.

Guardian angels

Business angels can invest anything from £5,000 to £250,000. Research shows that 90% of people willing to invest tend to do so with friends and family. Therefore looking at as wide a circle of friends, family and associates as possible can be key to finding the right investor.

The remaining 10% of angel investment is accessed through networks such as the South East Capital Alliance, which is managed by Finance South East. This gives companies the opportunity to pitch to some of the organisation's 100 registered investors.

If you have many investors interested in your company, choosing the right one to work with is hard and involves much more than simply picking the most attractive financial offer. Any company in this position needs to think about the type of investor that will best suit its needs.

Some business angels will want to play an active role in the business, whereas others will take more of a backseat as a silent investor. Seasoned investors will have a wealth of expertise, experience, resources and contacts available to them that could prove to be equally valuable to your company.

Whether you are pitching to the Dragons' Den or charming business angels, preparation is key. Make sure that your investment strategy is developed and your first approaches are made well before the need for finance becomes critical.

Decisions take time and investors do not like to be rushed. Nor should you - take the time to shop around. Even if a deal is offered to your company, it is not likely to be as good as might be achieved with plenty of time and negotiation.

Finding the right investor, someone that understands the goals and ethos of your business and that you can work with in the long run, can also be a time-consuming process and you certainly shouldn't settle for the first financial offerings.

Sound out every possible source of investment and present your company in the right way to attract each individual investor's interest.

Getting advice from as many sources as possible, and tapping into their contacts and experience can be a good way to start.

Choosing the right path for growth

With so many potential routes for securing funding available to them, Ambiental Technical Solutions have been careful to select those sources that are likely to support the way they want the company to grow.

Ambiental was founded in September 2002 to develop and sell leading-edge risk-mapping, modelling and visualisation tools. Their products can help local authorities improve their flood management strategies, property developers to comply with new legislation and insurance companies to set premiums more accurately.

Wherever possible they have sought advice from professional organisations.

The fund-raising process can be drawn out and time consuming. Ambiental believe that the key to success for any small business seeking investment is ensuring you spend sufficient time on preparation.

At the time of writing, Ambiental was close to securing funding for its new 3D floodmapping technology. The company successfully presented at the South East Capital Alliance (SECA) Investor Forum in February, along with five other companies who were all seeking between £50,000 and £250,000. The event gave the companies involved the chance to pitch to 22 potential investors.

In addition to their success at the SECA investor forum in 2004, Ambiental was awarded a DTI grant against stiff competition and has attracted interest from a large number of private investors, business angels and venture capital companies.

About the Author

Sally Goodsell is CEO of Finance South East (SECA), providers of investment support and access to finance for growing SMEs and entrepreneurs. You will find a guide to finance at www.financesoutheast.com. For information on finding finance or about the next event call 01344 758 450.

This article was first published by Better Business magazine, which offers practical proven ideas to help owner-managers transform their business, and have more fun doing it. Find out more at Better Business.

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