Mark Watson-Gandy talks on Angel Investors,
(Some notes I took)
Too Small for the Venture Capital House or The Market. . ..
Too Exciting for the bespectacled Bank Manager. . . .
Too Poor to do it yourself . . . .
Life is tough for the UK Small Business man trying to raise the finance to fund that leap from the back shed to the factory.
But a new trend in the UK seems to bring an answer. Following on the tails of a similar trend in the USA, there has been a big growth in one alternative source of finance called Private Equity Funding.
This is finance from "business angels", usually retired businessmen themselves, who are prepared to invest in the business on the strength of the entrepreneur's business plan, their knowledge of the entrepreneur and the negotiations with him.
Whilst investing in small company is only marginally safer than betting on the horses and a lot less predictable, it is a lot more fun. For a stake you must be able to afford to lose, you have the chance to be involved with the running of an energetic little company but with somebody else suffering all that grind and backache you went through years ago.
And heck - companies like Microsoft must have had to start from somewhere.
Getting the right business plan to the right business angel is still a hit and miss process in the UK.
Still, things are moving slowly. There are now business angel networks who pool new opportunities and investment opportunity magazines like Capital Exchange.
This means that investors and entrepreneurs can know the right advisers to go to put the deal together.
But suppose you are trying to raise finance by selling your shares. You've a mean business plan. But what is the investor looking for when he looks through it's pages? What will persuade him to whip out his cheque book?
Amongst the things the investor will be looking for are:
1. A good rate of return
An investor expects to be compensated for the added risk he is taking on your company.
His money could be sleeping safely in a bank earning interest. With your company he could lose all of it. He wants to know whether you will be able to give him a return that will justify the risk.
Offering a directorship may sweeten the deal as it promises a secondary income (through director's fees or a salary) from the investment.
2. A way of getting his money out
It doesn't matter how much the shares are "worth" if he can't sell them when he needs to. Build in a few workable exit routes for the investor so that he can get his money out if he needs to.
3. People he can trust
Business is about people.
An investor wants to feel safe that the business and his money is in good hands. Experience, a good credit rating and business related skills are important, but enthusiasm and determination count for a lot too.
Identify who the key man will be. The investor is looking for someone who really wants the business to work and is prepared to commit the blood, sweat and tears needed to ensure it does.
Things are going to be tough at the start and anti-social hours will need to be worked. He will not want to leave his money with someone who views the business as an excuse to create himself a "9 to 5" job or in a business comprising of "advisers" and not "doers".
Investing in shares is a high risk enterprise. The investor will want to minimize his risk as much as possible.
He will be interested to know whether there are any assets. It will make his investment a little less risky and the investment a little more palatable if he knows that if the worst came to the worst, there is a chance that he would be able to get at least some pennies back in the pound on his investment on the sale of the business assets.
A sense that he has control over his investment will be important to give feeling of confidence in the investment. For the investor this can be done by giving him a seat on the Board. It may have the added attraction of enabling the company to benefit from the investor's expertise.
The tax breaks created by EIS for UK tax payers investing in UK based companies, not only increase the return, but can be used to limit the investor's loss if the worst comes to worse.
5. The risks
Every deal has its good points and bad points. Naturally you want to show the good points but also identify as many of those risks in the transaction as you can for the investor. Far from discouraging him, it will show that you are realistic about the business and have taken time to think about the potential pitfalls the business is likely to face...and therefore are more likely to have put in place plans to meet those contingencies.
Show the investor what his money will be spent on and why you need that amount of money. It is his money that you are playing with and he will want to know that you will invest it prudently and ensure the money it makes is used to give him a return and not to buy that shiny company Porsche.
A tight control on financial expenditure is important from another standpoint. The less capital you use to earn your income the better the percentage return on his shares.
Don't be overly optimistic about the returns and profit margins.
The investor is more likely to be doubtful about your business sense than be bamboozled into buying your shares.
He knows you aren't likely to have a hefty surplus or make a profit in year 1.
If you are likely to, he will want to know why you are seeking equity finance and not a short term accommodation from the local bank.
Prices do increase and your fingers will need to take that added cost into account.
If you are paying yourself a wage make sure that it is realistic - whilst the investor won't be keen for you to live at his expense, an entrepreneur who starves himself is not much use to anyone. -