Essential guide to business angels

Finance of £25,000 to £750,000 can be surprisingly difficult to obtain. Banks generally require security and many venture capital firms are not interested in financing these amounts. A business angel might be the solution for your business.

Business angels are wealthy, entrepreneurial individuals who provide capital in return for a proportion of your company's shares. They take a high personal risk in the expectation of owning part of a growing and successful business.

Suitability for angel investment

Finding an angel

Pitching to investors

The right business angel

The investment process

1. Suitability for angel investment

To be suitable for investment from a business angel you should meet several criteria.

You want to raise £25,000 to £750,000 and are willing to sell a share of your business

• Raising finance in the form of equity (shares) strengthens your balance sheet. A bank (or other lenders) may then be willing to provide additional debt finance.
• Equity finance of over £250,000 is usually provided through a syndicate, when several business angels invest together, or when business angels co-invest alongside venture capital funds.
• An alternative is crowdfunding where a large number of contributors each provide a small amount of funding.

You are willing to develop a personal relationship with a business angel

• Typically, business angels want hands-on involvement - it is a personal deal.
• A business angel with the right skills can strengthen your business by adding skills or experience that you lack.

You can offer the business angel the possibility of a high return

• This usually means an expected average annual return of at least 20-30% over the life of the investment.
• Most of this return will be realised in the form of capital gains, typically over a period of three to five years.

You can demonstrate a strong understanding of your product and market

• Some business angels provide expansion financing for businesses with a proven track record. This enables an already successful business to grow.
• Business angels are also a significant source of start-up and early-stage capital for companies without a track record. A business plan based on thorough market research is essential.

You have an experienced and professional management team

• As a minimum, you must have strong product and sales skills.
• You need to show enthusiasm and commitment. A measure of your commitment will be how much money you (and other managers) have invested in the business and how strongly your personal earnings are linked to the success of the business.

You can offer the business angel the option of an exit

Even if the business angel has no plans to realise the investment by any particular date, the angel will want the option to be available. The most common exits are:

• a trade sale of the business to another company
• repurchase of the business angel's shares by the company at current market value
• purchase of the business angel's shares by the company's directors or another investor at current market value

2. Finding an angel

Many contacts are made informally

For example:

• personal friends and family
• wealthy business contacts
• individuals known to your professional advisers (eg your accountant)
• major suppliers and clients of your business

You may want to approach an angel networking organisation

• Many of the most active business angels use these services to find out about interesting investment opportunities.
• You usually have to supply a credible business plan and financial forecasts as part of the registration process.
• Once you are registered, the organisation passes information on to business angels. Typically, angels will attend presentation meetings (where you present your business to them) or receive bulletins.

You may want to use advertisements

• Various newspapers include advertisements from investors and from businesses looking for finance.
• If you want to advertise your business, the advertisement will have to meet the newspaper's standards.

3. Pitching to investors

You usually do not get much time or space in which to present your business to potential investors. Prepare a convincing, concise pitch.

Explain your business to prove that you understand what you are doing

• Explain what your business does. Avoid incomprehensible jargon.
• Explain what the key factors to the success of your business are. For example, product excellence or uniqueness, focusing on a specific market niche, or superior customer service.
• Explain how you intend to use the money you raise. For example, to buy new equipment.
• Remember, your pitch should be tailored to raising money.
• Business angels will be far more interested if you can demonstrate that you have firm, profitable orders from 'blue chip' companies, and have invested your own money in the business.

Demonstrate that you are offering a potentially profitable opportunity

• Highlight your key financial projections.
• Stress the progress you have made so far. For example, show your previous sales and profits growth, and include references from committed customers.
• Mention any endorsements you have. For example, an order from a blue chip customer or a good review in a newspaper.

Indicate what you are offering

• How much money do you want to raise and what percentage of the business are you willing to sell in return? Remain flexible.

Be prepared with the details

• You should have prepared a full business plan even if you are not making it available to potential investors at this stage.
• You need to be able to justify what you have said and written.
• At a presentation, you should be prepared to answer most questions immediately.

4. The right business angel

Investments by business angels are comparatively informal and rely on a greater degree of personal chemistry and trust than other forms of financing. But you still need to negotiate the legal aspects.

Look for a business angel whose priorities match your needs

• If you only want investment, look for an angel who is happy to be a passive investor.
• If you need help, look for an angel with the time and skills that you need. For example, management experience, technical expertise, or contacts.

Decide whether the business angel is someone you could work with

Your aim is to develop a personal relationship. Try to get answers to the following questions:

• What motivates the business angel? What is the angel looking for?
• What skills does the angel have to offer?
• What appeals most about your business?
• What causes the most concern?
• What key weaknesses does the angel identify?
• Which aspects of the business does the angel find exciting?

Check the business angel's credentials

• This is particularly important if the angel is using the investment to buy a job.
• Ask for a copy of the angel's CV. Look for evidence of previous success.
• Confirm the angel's track record by contacting previous employers and companies the angel has invested in. Telephone or visit them. (If you ask for this information in writing, you are likely to get a guarded response.)
• Try out the business angel. You can get a better idea of an angel's skills by asking what the angel would do about a particular problem.

5. The investment process

The larger the investment, the more complicated and time-consuming the investment process is likely to be. For larger investments you may want to use specialist advisers who are experienced with this kind of deal.

Once an angel has expressed an interest, confirm that the financing is available

• Even though you may not have agreed final investment terms, you do not want to waste your time with someone who has insufficient funds.
• If you are still going to need additional financing, you will need to start arranging it immediately.

Negotiate key issues and what-if scenarios

Give the angel a copy of your business plan as a basis for discussing key points such as:

• The investment - how much the business angel invests, the form of the investment, and what the angel gets for the investment.
• Withdrawing money - what dividends, fees and salaries will be paid to each of you. Under what circumstances can these be changed?
• Responsibilities - who makes which decisions and who will be responsible for each area of the business.
• Performance - how individual performance will be monitored. What will be done if performance is not satisfactory?
• Growth - what your main objectives are and how you will achieve the next stage of growth. What will happen if the business needs more capital?
• Exit - how and when the business angel will be able to realise the investment. Who will the angel be allowed to sell shares to?

Provide the business angel with any information required

• The business angel will want to check financial and legal details, and confirm other points about your business and the market.
• Your accountant will be able to help prepare any financial information you need (eg annual accounts).
• For larger investments, the business angel may use professional advisers to investigate your business.

Negotiate any legalities the business angel is concerned about

The business angel may ask you to provide:

• Warranties confirming that information you have provided is true. If the business later fails and it can be proved that you gave misleading information, the investor will usually have the right to claim compensation from whoever provided the warranty (typically you).
• Indemnities, where you agree to accept liability in certain circumstances. For example, if the company is sued in relation to contracts which have already been completed.

If asked for either of these, get advice from your solicitor.

Agree the final investment terms

• Your accountant and solicitor will be able to advise you on what form the investment should take and help you negotiate investment terms.
• It may be possible to structure the investment to make it more tax efficient for the investor.
• Make sure everything is in writing, including all the key issues.