Business angels
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Business Angels
Business owners often report that company
finance of £10,000 to £250,000 can be very difficult to obtain - even from
traditional sources such as banks and venture capitalists. Banks generally
require security and most venture capital firms are not interested in financing
such small amounts. In these circumstances, companies often have to turn to
"Business Angels".
Business angels are wealthy, entrepreneurial
individuals who provide capital in return for a proportion of the company
equity. They take a high personal risk in the expectation of owning part of a
growing and successful business.
Businesses Suitable for Angel Investment
Businesses are unlikely to be suitable for
investment by a business angel unless certain conditions are fulfilled.
(1) The business needs to raise a reasonably
modest amount (typically between £10,000 to £250,000,and is willing to sell a
shareholding in return for financing. Equity finance of over £250,000 is
usually provided by venture capital firms rather than business angels. The
exceptions are when several business angels invest together in a syndicate or
when business angels co-invest alongside venture capital funds. The sums raised
can easily exceed £250,000. Raising finance in the form of equity (shares)
strengthens the business' balance sheet. Banks (or other lenders) may then be
willing to provide additional debt finance.
(2) The owners and managers of the business are
willing to develop a personal relationship with a business angel. This is
important. Typically, business angels want hands-on involvement in the
management of their investment, without necessarily exercising day-to-day
control. This relationship can be a positive one for the business. A business
angel with the right skills can strengthen a business by, for example, offering
marketing and sales experience.
(3) The business can, and is prepared to offer
the business angel the possibility of a high return (usually an expected
average annual return of at least 20%–30% per annum). Most of this return will
be realised in the form of capital gains over a period of several years.
(4) The business can demonstrate a strong
understanding of its products and markets. Some business angels specialise by
providing "expansion finance" for businesses with a proven track
record, or in particular sectors. This enables an already successful business
to grow faster. 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 convincing market research is essential.
(5) The business has an experienced and
professional management team - as a minimum with strong product and sales
skills. If there are weaknesses in the existing management team, a business
angel can often provide the missing skills or introduce the business to new
management.
(6) The business can offer the business angel
the possibility 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. - Purchase of the business angel’s shares by the company’s
directors or another investor.
Finding an angel
Many contacts are made informally.For example:
personal friends and family; wealthy business contacts;major suppliers and
clients of the business. Investors can also be found by approaching formal
angel networking organisations. Many of the most active business angels use
these networks to find out about interesting investment opportunities.
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