Michael Blakey of private-equity firm Avonmore Developments receives up to 800 new business ideas a year from entrepreneurs looking for investment. He tells us why the majority don't make the cut.
1. Failing to describe what your business does
It may come as a surprise, but many entrepreneurs struggle succinctly to describe what their business has been set up to do and why it differs from the competition. The old idea of the elevator pitch really holds true for most angels and you need to get to the point in a minute or less. Experienced angels can assess an opportunity quite accurately in the opening minutes of a presentation – we see so many ideas, so it’s essential to focus on the key points. So work hard on that opening presentation, it’s absolutely vital.
2. Entrepreneurs who over-value their businesses
Early-stage entrepreneurs are frequently unrealistic about what their businesses are worth when they first talk to us, and what they will be worth over the period of the investment. They see the headlines about massive valuations for the likes of Google, Facebook and Twitter but fail to appreciate that these are the exceptions rather than the rule. They also often apply the "hockey stick" approach to sales forecasting, where their expectations of massive growth determine their overall valuation – often without real justification.
Valuation issues aren’t reserved for “naive companies”; 90 per cent of the businesses which excite us still fail to receive investment due to valuation issues. It’s important to be brutally honest and realistic about valuation – aggressive and ambitious numbers are great news, but only if you have the evidence to support them. As a rule of thumb we are looking to achieve at least a ten times return on our investments.
3. Entrepreneurs who don’t research what investors need
It is not unusual for businesses to seek investment without doing any research about the potential partners they are pitching to. There is little point in pitching a business idea to an angel who has no interest in the entrepreneur’s market segment. Similarly, most VCs are not going to be interested in an investment of a few hundred thousand pounds and most angels are not going to look at multi-million pound funding rounds (although of course there are sometimes exceptions to this rule).
4. Large founder salaries, large debts
Angels worry if the business owners looking for investment plan on paying themselves a large salary. What’s the objective? Is it just a lifestyle business or is everyone involved going to earn a real return? Equally, a business looking for investment when it already has large debts may be looking to survive rather than excel.
5. Bad funding models
Growing businesses needs their management team working on what makes them a success, not constantly raising finance. So, a business which plans to raise one tranche of money and then more again in six months can quite easily be held back by the sheer effort this process required. As investors, we want to see the company raise sufficient capital to ensure that they have a realistic chance to reach critical value milestone – at least 12 months cash on prudent financial forecasts is a good figures to go for.
6. No clear exit strategy
It can be difficult to imagine exiting from a business when you’re still on the road to success. Entrepreneurs will often at best have only a rough idea but it’s a vital consideration for us – who are the likely buyers? When will our investment mature? What strategy will get us all to the point when we can meet the objective of the exercise, which is to make a profitable investment?
Business owners who can effectively address all these issues early in their relationship with any potential angel investor have a much greater chance of success – not just in securing financial backing, but in realising the ambition which has brought them to us in the first place.
Michael Blakey will be speaking at The London Funding Conference, the must-attend event for businesses looking for growth capital. The London Funding Conference is being held at The British Library Conference Centre on March 9, 2011 and will include a wide variety of expert speakers and a keynote presentation from entrepreneur and investor Luke Johnson. For further information and booking details, visit: www.londonfundingconference.com