All business angels are wealthy individuals looking to invest around 10% of their wealth in high risk and high growth early stage companies which they think can give them at least a ten times return on their investment over three to seven years.
Many business angels are looking to get actively involved in the companies in which they invest and this means that they typically prefer local investments and investments that they understand, often on account of their own inside knowledge in the relevant business sector. The average size of an angel investment is £42,000 per investor and the average percentage stake acquired is 8%. Though on occasion a business angel will invest alone or invest more than £100,000 in a business. There is an even 50:50 split between angel investments in revenue generating businesses and pre-revenue businesses, though recent surveys suggest the average may be moving in favour of revenue generating companies.
What are investors looking for?
All investors are looking for the opportunity of making a ten times or greater return on their money in around five years. The less the risk, the lower the return they expect, but it will always need to compare favourably with a well managed portfolio of listed investments on one or more of the world’s stock exchanges.
They are looking for the right team to back to produce a successful exit and always like a good track record. They favour opportunities with a large addressable market undertaken by a company that knows its target customers, how to sell to them and how to generate revenue from each sale.
They like businesses they can understand and help with to some extent. Many investors will open their “black book” of contacts and often this is every bit as valuable as the cash they provide.
They also like tax efficiency. All UK taxpaying private investors receive up to a 65% tax break to invest in qualifying businesses under the Enterprise Investment Scheme. You therefore need to know about this and ensure your business qualifies if you are seeking UK business angel investment. You might find this article useful in this respect.
All of the above is, by definition, quite generic. Different investors want different things. It is easier to be more specific to say what investors don’t like. Accordingly, we asked Michael Blakey, Super Angel” and investor with Avonmore Developments and set out what he told us below.
Whatare investors looking to avoid?
Failing to describe what your business does
It may come as a surprise, but many entrepreneurs struggle succinctly to describe what their business has been set up to do and why it differs from the competition. The old idea of the elevator pitch really holds true for most angels and you need to get to the point in a minute or less. Experienced angels can assess an opportunity quite accurately in the opening minutes of a presentation - because we see so many ideas it’s essential to focus on the key points. So work hard on that opening presentation, it’s absolutely vital.
Entrepreneurs who over-value their businesses
Early stage entrepreneurs are frequently unrealistic about what their businesses are worth when they first talk to us, and what they will be worth over the period of the investment. They see the headlines about massive valuations for the likes of Google, Facebook and Twitter but fail to appreciate that these are the exceptions rather than the rule. They also often apply the ‘hockey stick’ approach to sales forecasting, where their expectations of massive growth determine their overall valuation – often without real justification.
Valuation issues aren’t reserved for “naive companies”; 90% of the businesses which excite us still fail to receive investment due to valuation issues. It’s important to be brutally honest and realistic about valuation – aggressive and ambitious numbers are great news, but only if you have the evidence to support them. As a rule of thumb we are looking to achieve at least a 10 times return on our investments.
Entrepreneurs who don’t research what investors need
It is not unusual for businesses to seek investment without doing any research about the potential partners they are pitching to. There is little point in pitching a business idea to an angel who has no interest in the entrepreneur’s market segment. Similarly, most VCs are not going to be interested in an investment of a few hundred thousand pounds and most angels are not going to look at multi-million pound funding rounds (although of course there are sometimes exceptions to this rule).
Large founder salaries, large debts
Angels worry if the business owners looking for investment plan on paying themselves a large salary. What’s the objective? Is it just a lifestyle business or is everyone involved going to earn a real return? Equally, a business looking for investment when it already has large debts may be looking to survive rather than excel.
Bad funding models
Growing businesses needs their management team working on what makes them a success, not constantly raising finance. So, a business which plans to raise one tranche of money and then more again in six months can quite easily be held back by the sheer effort this process required. As investors, we want to see the company raise sufficient capital to ensure that they have a realistic chance to reach critical value milestone – at least 12 months cash on prudent financial forecasts is a good figures to go for.
No clear exit strategy
It can be difficult to imagine exiting from a business when you’re still on the road to success. Entrepreneurs will often at best have only a rough idea but it’s a vital consideration for us – who are the likely buyers? When will our investment mature? What strategy will get us all to the point when we can meet the objective of the exercise, which is to make a profitable investment?
Business owners who can effectively address all these issues early in their relationship with any potential angel investor have a much greater chance of success – not just in securing financial backing, but in realising the ambition which has brought them to us in the first place.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.