Although it may not reflect ‘real life’, the BBC’s Dragons’ Den programme has done a good job in highlighting the role that angel investors play in the business world.
It may seem counter-intuitive, but the ongoing economic downturn has actually resulted in an increase in business angel activity. As the returns from more traditional means of investing dwindles, some investors are more prepared to invest in riskier propositions rather than watching their capital increase by 2% per annum elsewhere.
Business angels work alone, or as a pack (via an angel network or ‘syndicate’), and usually look to invest in high-growth markets.
Unsurprisingly, you will need to be armed with a well-written realistic business plan to impress a potential investor. There are no firm rules for how angel transactions take place, suffice to say that things can progress far more rapidly by doing business with an angel investor than a less fluid type of investor.
With this in mind, we look at some of the main questions most small business owners have about dealing with business angels:
How do business angels operate?
Angels are typically wealthy individuals who may have up to £500-750k to invest. They often look for opportunities in industries and markets they are familiar with. This makes a lot of sense, and may benefit you due to the experience they can offer.
Potential investors will want to know all the background behind the business, the people involved, and the expertise of the current management team. Above all, they will need to be confident that their investment is in safe hands.
Your business plan, and initial discussions will show the investor what the USP of the business is, and what gives it an edge in the marketplace. They’ll want to examine your track record, and what your growth targets are.
They will expect you to have taken a risk in starting the business, and will not expect their capital to be used to pay your wages.
You should be able to provide a business angel with an exit strategy, whether it be over one, three, five years or more.
Why does the angel want to invest in your business?
Just as an investor will want to find out as much as he can about you, it is essential that you understand the angel’s motivations. Do they see your business as a vehicle to make a ‘fast buck’, or do they genuinely find your proposition interesting and something they could add value to over time?
What can the investor provide to your business?
As we have already mentioned, an investor can often provide even more valuable assets to your business aside from a capital investment. Angels are often very successful business people in their own right – they may have created and sold their own companies in the past, and may even expect to be involved in more than a financial way. If the ambitions of the angel and you are similar, you could be on to a winning formula!
How much involvement can the angel provide?
As the Dragons’ Den programme shows, despite their best intentions, there are limits on the amount of time angels can provide to their chosen ventures.
From the start, you should have a clear agreement on the amount of time your investors will dedicate to your business. For all the benefits an angel can provide, you need to maintain a healthy balance to ensure the boundary between ‘help’ and ‘interference’ is never crossed.
The exit strategy
When making an initial investment in a new project, business angels will already be planning their exit. This is something you should also focus on as a business owner – it may well be that you sell the entire business x years down the line, reaping rewards for both you and your benefactor.
The UK Business Angels Association (which superceded the BBAA in 2012) has a lot of useful information, including an investors’ directory. Find out more here.