Business Angels are high net worth individuals, generally successful entrepreneurs or business people themselves, looking for the opportunity to invest in up and coming businesses.
There is no such thing as a typical business angel or angel group but one thing they have in common is that they invest in people as much as in business propositions. A good business plan is necessary, but never sufficient, to clinch a deal. The investors’ perception of the qualities of the management team, and chemistry with them, has to be right.
Angel investment offers: Long term risk finance - the angel is taking the risk of sharing in the fruits of the business as they ripen. If there are no fruits there is nothing to share - or it could be a share of significance if your company has prospered. Business skills and experience - since they tend to invest in sectors they understand, angels can be an important source of advice and mentoring for the management of innovative or technology-based businesses. Credibility and leverage - with their track record of achievement, having business angels on your team can greatly influence other funders. Quite often the angels have the financial skills and contacts to help bring the whole package together.
Collectively, business angels have many millions available but they tend to be active mainly in the range of £25K to £500K. The most common investments by individuals tend to be around £25K to £50K but syndicates or structured angel groups can come up with much more. This latter kind of risk sharing through group membership is now the predominant style of angel investing in Scotland, particularly in the high-tech sector, so it is important to understand what they consider important.
Firstly, most business angels focus on companies which qualify under the HMRC Enterprise Investment Scheme or Seed Enterprise Investment Scheme. Establishing your eligibility should be a first step before seeking investment. More information can be found at www.hmrc.gov.uk/eis and www.gov.uk/guidance/seis.
After that choose your targets, don’t just use a scatter gun approach. Most angel groups have websites which highlight their preferences and criteria – and showcase their existing portfolios so you can see were they have really been putting their money. Think about their sectoral relevance, their skills and experience and whether they have the capacity to follow their money as your business grows.
Then you need to get a hearing with the group ‘gatekeeper’ or screening committee. This needs a really strong executive summary which doesn’t dwell on your technology or product but on the problem it solves and the business opportunity it creates. Demonstrate that there is a large growing market - and you know how to access it; that your investors can make a significant multiple on their investment in three to five years and that you have clear understanding of the route to that exit and how much capital it will take to get there.
Understand the process – study a couple of investment agreements; know which conditions are ‘standard’ and don’t waste time disputing them; prepare for challenging diligence and expect delay!
David Grahame
Executive Director LINC Scotland
www.lincscot.co.uk
