Although it may not reflect ‘real life’, over the past 15+ years, the BBC’s Dragons’ Den programme has done a good job in highlighting the role that angel investors play in the business world.
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 common questions 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 a business 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.
5 essential things you should do if you are seeking angel investment
Angel investors can be a lifesaver for a small enterprise – not only can they supply capital investment, but they often have years of valuable experience to offer a fledgling business.
As viewers of Dragons’ Den will know, securing angel investment is no easy task. Although much of the BBC show is put on for our entertainment, many of the business owners who appear on the show make the same fundamental mistakes.
Here are five things you must consider if you are seeking investment from a business angel;
1. Inflated valuations
Probably the most common problem business owners have is to attach a realistic value to their businesses. Being so close to the business can remove almost all objectivity in some cases.
Although you can use some standard business valuations to put a value on your venture, there are no firm rules. Valuing a small business is tricky at the best of times, but it is especially difficult to do so if your business is a start-up that has yet to get off the ground.
Try to be realistic, and remember that a business angel could add a lot of value, even if they demand a larger piece of the pie than you had expected.
2. Poor planning
If you are serious about attracting investors, you must have a solid business plan, with financial forecasts in place.
You need to show that you have a realistic plan in place, and be able to explain how you would react in a number of scenarios, such as the advent of an economic downturn, or if there was a steep increase in the price of components.
Don’t get too attached to the plan, but show that you are serious and that the numbers add up.
3. What is your USP?
Rather than focusing on the product or service you are offering, investors will want to know what differentiates your business from others in the market. What solution are you offering? What is your Unique Selling Point (USP)?
This ByteStart guide explains how you can develop a strong USP and use it to get more customers and become more profitable.
4. The business angel’s motives
Don’t always assume that an angel investor is in it purely to make money. Most angel investments provide poor returns, but some do exceptionally well. Many investors actually enjoy getting involved in new business ideas, and offering their expertise, as well as looking forward to the prospect of achieving a good Return on Investment (ROI).
Make sure there is a good fit between you and a potential investor, whatever capital they are prepared to invest. Make sure you can also offer a realistic exit strategy for both you and a prospective investor.
5. Who are you?
Both parties need to find out as much about each other as possible before a deal takes place. Some of the key questions to get answered are;
- What can the investor offer in terms of time, money and expertise?
- What experience and qualifications do the managers of the business have?
- Is there chemistry between the two sides?
- Could you actually work together if the incentive of a cash injection were not there?