One way of raising finance for your business is to look for a business angel.
Typically, these are wealthy people who have often made their fortunes through being in business or investing in other ventures. Anyone familiar with the BBC2 programme Dragons Den will get the idea.
A business angel is someone who is prepared to invest in a start-up venture, often a risky one, in return for equity in the company, and investment usually involves their time and money.
Exact figures are hard to come by, but according to Colin Mason, professor of entrepreneurship at Strathclyde University, there are over 100,000 business angels in the UK, with access to £12bn in equity, investing up to £3bn annually.
According to government-backed organisation the British Business Angels Association (BBAA), business angels typically invest between £10,000 and £750,000 in a business. A small initial investment may be followed by later rounds of financing, where required, so an ongoing business relationship develops between angel and company. Angels also often help a business to succeed using their own skills, experience and contacts. There may be times when they just keep an eye on what is going on, while at other times weighing in with quite a bit of help.
Where larger amounts are invested, or where the risks are high, this may be done through a syndicate organised through personal contacts or a business angel network. The lead investor is sometimes referred to as the archangel. Investments are usually made in return for a share in the business.
The BBAA says business angels invest across most industry sectors and stages of business development, but especially in early and expansion-stage businesses. Most prefer to invest in companies within 100 miles of where they live or work. Investors in technology companies tend to be more prepared to travel longer distances.
Business angels are a vital tool used to fill the gap between venture capital and debt finance, particularly for start ups and companies in the early stages of development.
Although business angels sound like a gift form heaven, it is thought that the success rate for those who pitch to angel investors is very low. About 90 per cent of plans are ruled out at the first stage and seven out of eight opportunities are rejected thereafter. However, start-ups shouldnt be discouraged from trying.
One of the reasons many entrepreneurs prefer to approach a business angel is that apart from the financial input, those angels are also able to offer their support and knowledge, which is often considered to be worth as much as the financial package. They provide mentoring and guidance as well as many useful contacts, which makes having a business angel very attractive to the start up.
Sourcing angel funding isnt easy and neither is the process, once you have found one to support your venture. Reaching a deal can be tough and often there are many issues to overcome before an agreement is reached.
A company will have a clear idea of its potential and will want to conserve as much equity as possible, whereas an angel will want a good stake in the company in return for the risk of investment in a business that has yet to prove itself in terms of sales, turnover and assets.
It is during negotiations that the terms are set out and any level of future involvement is also established. Many business angels will want to be on the management board so they have some control in the way the business is run, whereas others are flexible in their approach and offer input as and when it is needed.
But what if the business fails? Like any other loan, business angels still expect their money to be paid back. Figures suggest most angels end up writing-off money – probably about 40 per cent of investments. Other forms of payback are preferred though and these are likely to be set out in the formal agreement when terms are discussed.
Angel investment is generally considered to be an expensive way of raising cash because of the cost of equity involved, so start-ups are still strongly advised to seek other ways of raising finance. Draw on your own assets first and approach family and friends so that when your company is doing well, you will still retain your companys equity.