Winning over angel investors means getting a pitch just right, and having a sound business backed up by figures. Here’s how to tell if it’s the right kind of finance for a business.
An angel investor is someone who provides a startup or small business with a cash injection to either help it get off the ground or fund expansion projects.
The angels offer this funding in exchange for equity in the business, which is something that puts many small business owners off as it means they will no longer have full control over business decisions.
This may sound familiar, as it is very similar to funding through venture capitalists (VCs). However, the main difference is that an angel investor is an individual, whereas VCs will be an organisation or company. VCs are less likely to be involved with very early stage businesses.
We caught up with Tim Mills, investment director at the Angel CoFund, to find out more.
The Angel CoFund was launched in 2011 with two objectives: to provide direct investment to high-potential SMEs, and to support the development of the UK business angel market by encouraging syndication and best practice.
Weighing up the pros and cons
Angels do get a slice of the business, and while the percentage is negotiable, it means the founder no longer has total control of the business.
Often, an angel investor is a friend or family member, in which case it might be possible for them to have a more hands-off approach. On other occasions, an angel may be quite controlling – it’s down to the individual, and you should always make an effort to get to know someone and the direction they want your business to take before signing away a portion.
“The disadvantage of angel investment is that raising funds usually requires more connections than institutional funding, such as venture capital – depending on how much the business is looking to raise. A single relationship with a VC could get a business £5m over a period of a few years, whereas to get an equivalent amount through angel investment, the business would have to foster many angel relationships to get the critical mass,” explained Mills.
“This, of course, also means more voices on the direction on the business, so we’d always advise companies to be cautious and ensure they know the investor well, and exactly what influence they’d like to have on the business.”
However, sometimes an investment from angel investors can be a good thing. Perhaps they have a background in the sector they’re investing in, and can be a good mentor.
“Angel investors bring more than just money – they are experts that can bring considerable insight, know the sector, and are well networked, all of which add a great deal of value to developing business,” said Mills.
“Also, what is often overlooked, is the credibility a well know angel investor can contribute, which can be valuable as the company looks to attract more capital or even in securing customers and business.”
Perfecting the pitch
If a business owner decides that angel investment is the right approach for them, they must first be sure that their business is an attractive prospect. It’s not just about having that million-dollar idea, the business behind it needs to be sound.
“When you are looking at a potential investment you really are evaluating two things. Firstly, if the concept has potential – whether it is original, if there a place in the market, whether the product up to scratch, if it will make money. Secondly, whether the team behind the concept is able to execute. It might be surprising to some, but the second factor is arguably more important,” explained Mills.
“Pick any person off the street and they probably have a good business idea tucked away somewhere, but a team of people that can bring a good idea to fruition is far rarer.”
Nailing the pitch comes down to selling all aspects of a business – the idea, and the people behind it. An entrepreneur pitching to business angels needs to demonstrate their understanding of their sector, and should be able to produce a well thought through business plan.
According to Mills, what people often forget is that angel investors are looking for integrity in the people they are backing.
“If you are selling a false persona this almost certainly will show through. If you are able to gain trust, bring people in to your vision of success, and demonstrate clearly what you are trying to do and why you are doing it – you are most of the way there.”
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