Q.My small business needs financing – how do I find an angel investor and what kind of businesses do they fund?
A. With so much uncertainty lingering in the markets, it is a difficult time to find investment. But since last summer, activity has picked up among angel investors – wealthy individuals who invest in start-ups. For a small business looking for funding, angels are one of a collection of dwindling sources. The best place to find an angel is to look up the local angel network in your region. Some established networks include the British Business Angel Association, Venture Giant and the private investors’ unit of Vestra Wealth, which all exist to share knowledge and filter pitches from entrepreneurs. The UK boasts around a third of Europe’s angel investment with small businesses successfully raising £1bn each year through this model (though this still pales in comparison to the US’ $25bn annually). Angels provide funding to businesses that find themselves in limbo between the entrepreneur’s personal capacity to raise money from friends and family and the £1-£2m investment level of venture capital firms – a normal investment is around £300,000-£500,000. Most of these businesses, which are off the ground but still not profit-making, involve costly innovation that will take time to generate a return and as such, angel investment is concentrated in ICT, medical technology and creative industries.
Q.How do I persuade them to fund my business?
A. The most important task is to extensively think through your pitch before approaching an angels network. Angel investment is very high-risk, so investors want to know why you need the money, what your competitive advantage is, where the money will go and what returns you will generate. For this you need to construct a realistic business plan that aligns your aims with those of the investor and lays out a path for them from investment to exit, usually spanning three or five years. Because gambling on an unproven innovation is risky, investors will only do so for ideas and businesses they think could deliver returns of around ten times their investment over around five years. Anthony Clarke of the London Business Angels Association says: “If you don’t think the business has the potential to make that level of return then you shouldn’t invest because it’s a lifestyle company. It needs to be ambitious.” It also pays to be persistent. The London Business Angels Association receives around 1,000 applications each year and selects only 40 for each pitching session, held every seven weeks. Of those, 30-40 per cent receive funding.
Q.What happens after you get the funding?
A. If an angel invests, they then own part of your business – usually a significant minority stake. Many investors do so in syndicates, which are groups of up to ten angels who pool resources and risk. A representative from the syndicate will usually sit on the board of your company, giving advice and receiving information to feed back to the others. You should be sure to keep them informed so that if you need to come back for more funding, you retain their confidence and interest.