Ibrahim Maiga spoke to Michael Weaver, the chief executive of leading angel investment firm Beer & Partners to find out what this part of the investment world is all about and what it would take to win funding for your business from him.
What is angel investment?
Angel investment is investment into businesses by high net worth individuals. The name derives from the term "theatre angels" - people who invested in stage productions without whom they would never have gone ahead.
What's the difference between angel investment and venture capital investment?
Angels are individuals investing their own money, while venture capitalists (VCs) are investing other people's money. And that, in practice, makes a big difference to how they work. If things go wrong, VCs might close the company down or sell it at a loss because it's not their own money invested. Angels, on the other hand, have taken a business risk alongside the entrepreneur and have experience of running their own companies. They're more likely to take their jackets off, roll up their sleeves, and help sort out problems, bringing a wealth of practical experience, knowledge and knowhow to the table.
How does the angel investment industry compare in the UK, Europe and the US?
Angel investing is far more advanced in the US, where local syndicates of angel investors back new and expanding business with substantial sums. The UK is about five years behind, but angel investing here is stronger now than it's ever been. Beer & Partners is attracting new angel registrations at the rate of one per working day and we now have over 1,800 high net worth investors with over £2.4 billion to invest in total.
Europe is much further behind, which is largely because in the past banks have played a big part in funding new businesses, often taking equity stakes as well as lending. Businesses in Europe are now looking for angel investors as bank funding dries up, but the angel investing industry is in its infancy there.
What's your firm's role in the angel investment industry?
We screen investment opportunities and accept companies as clients if we feel they'll have a good chance of successfully attracting investors. Investors use our services so that they don't waste a lot of time looking at unattractive propositions - they all have preferences regarding sector, business stage, location, size and shareholding and are only approached by us with opportunities that fit. We also hold workshops for investors new to angel investing and "meet the expert" events where they can keep up to date on specific issues such as tax or new legislation.
What do you look fo in a new business?
A clear and rational business plan demonstrating plans for significant growth; a realistic valuation of the business; a management team that has the ability to create profits; an exit strategy, perhaps through a public offer, a trade sale or debt buyback; and investment readiness.
At present, we turn away deals with funding requirements below £100,000 as we feel that our fees structure doesn't provide value for money at this level. We do, however, have plans to help in this sector next year and already hold events to cater for it.
How do you ensure you make the right decision on borderline investment cases?
We don't always get it right! And we lose as much sleep over taking on what might be an uninvestable company as turning away the next big thing.
We successfully raise funding for around 45 per cent of our clients, but this means we fail over half of them. But the industry generally only has a 20 per cent success rate and we strive to maintain our own USP of having the best record and being the most likely to raise funding. So our quality threshold is high, which means that entrepreneurs have to be well-prepared and dedicated to be taken seriously by us. We think, for instance, that we would probably have turned away Facebook had they approached us all those years ago!
What advice would you give to potential entrepreneurs who want to make a good impression on investors like you?
You need to understand your business back to front and upside down. It's no good saying you don't understand your financial projections and accounts and that you have a bookkeeper or finance person on hand for that. You need to master at some level every aspect of your business or how will the investor be confident that you can manage those who do these tasks full-time? Be open about your weak areas, but have a plan for how you'll tackle them.
Don't evade difficult topics such as "What are the risks in this business?" A response that there are no risks indicates that an entrepreneur hasn't thought it through. It's better to have a plan B, a plan C, and to be candid that if both fail it's Armageddon! Investors understand risk and that they might lose money.
Don't take things personally - be prepared to discuss, not argue, your points. Remember that, if nothing else, you're getting some free advice, an indication of how investors see your business, and some ideas for how you need to position yourself in the future.
10 steps to getting funding
1. Decide how much you need
Make sure the amount you're asking for is sufficient to get you to your goals, but don't be too greedy - if you fail to secure any funds at all you might not have a business to take forward.
2. Create a business plan
Only include what you need to keep yourself on track and to give investors a clear idea of where you're taking the business.
3. Determine a sensible value for your business
Be realistic and make sure you justify it.
4. Define your unique selling points
Research the market and put yourself in the mind of the competitors to figure out how they'll react to your entrance.
5. Make sure you have a strong team
Consider what skills you and your existing team have and what needs to be brought in.
6. Appoint a solicitor
Make sure they have relevant experience. Make sure their charges are commensurate with the size of the business and try to obtain fixed fees for the work rather than being charged hourly.
7. Protect your business
Seek professional advice on intellectual property assets and employment law if necessary.
8. Prepare for your business to be inspected
Always expect investors to want to research your business and be prepared, by seeking professional advice if necessary.
9. Have a long-term goal
Always know where you want to take the business, and ensure that your route forward is at the front of your mind when speaking to any potential investors.
10. Make sure your potential investor is right for you
Find a reputable business angel network or corporate finance house that has a proven track record, and ask them the right questions.