Many successful entrepreneurs are interested in helping new entrepreneurs with their start ups. The angel investment market is growing in the UK and worldwide as investors look for alternatives to poor stock market and deposit returns. How do you find the right investor for your start-up?
While money is important when establishing a new venture, there are many other factors to consider when developing a relationship with any third party, and in particular when looking for an external investor.
The synergy between the venture and the investor can define whether or not the partnership concludes in a successful exit (Kaufman Foundation study 2011). There are several factors to consider here:
- What experience of your sector does the angel have?
- What level of intellectual investment is the angel willing to make, in both the venture and the management team?
- What contacts does the angel have which could be used to accelerate the growth of your venture?
- Am I/are we willing to listen to the angel investor/s?
In order to give your new venture maximum potential for success the answer to the above should be a resounding yes; not only do you have to find a business angel with sufficient cash to make your venture possible, you need to find one who is able to add value to you and your venture.
For these reasons when you find a suitable angel investor you must be in a position to give yourself maximum potential of securing that angel investor.
What to consider
Knock on the right doors, investigate the type of investments an angel likes to make: retail, bioscience, manufacturing? It is unlikely an angel who predominantly makes investments in the retail space will be:
- Highly knowledgeable about bioscience
- Willing to invest in bioscience
- Have significant contacts in bioscience
It is probable that this investor is not going to wish to invest in your idea or be able to add any value to your venture.
Understand the wider subject, you should be able to demonstrate a significant depth of knowledge in your sector. Know the latest developments, the significant players, and what is in the press.
Have an understandable idea which solves a real problem, even if this is a new product or service it should have a clearly defined market.
Have a clear plan which matches the strategy of your angel. If your research tells you your angel normally exits in 2-3 years a ten year exit plan is probably not going to work for them.
Be honest, tell them about any concerns you have, they will almost certainly spot them during any due diligence process. Once you have secured funding and you are executing your plan, tell the angel/s about any mistakes, this will build trust and cooperation within your relationship.
Now you have identified several potential investors how do you get their attention?
Angel Investors tend to be busy people, be persistent, and use email, phone or business events to introduce your idea to them. Have an elevator pitch prepared and rehearsed, your ability to deliver this will demonstrate a true understanding of your proposition. Don’t confuse persistence with stalking, know when to look for an alternative angel.
Tell the angel why you have chosen them as a preferred investor, their contacts, previous knowledge of your sector, and previous success in a similar venture. While money is important, an investor without relevant experience can kill a project.
Make sure you have a well constructed plan which bears up to scrutiny, include details of the idea, the market, your competitors, sensible sales forecast, your team, and an exit strategy.
Be prepared to listen, if you have chosen your investor wisely then take advantage of their experience and learn from them.
If you get to the stage of the angel investor making you an offer, be prepared to negotiate. 3 out of 5 deals which make it to offer will fail at this stage due to an inability to agree a deal (Mason and Harrison 2011). I am sure you will remember Levi Roots on dragons den, looking for funding for Reggae Reggae Sauce; he wanted to give up 20% of his business but had to negotiate to 40%. You may think he gave up too much but he received the investment he wanted and two investors with relevant experience which helped the venture succeed. We will never know if Levi would have been successful without Peter Jones and Richard Farley, however we do know Reggae Reggae Sauce is now a household name and Levi is a wealthy man.
Remember angel investors have the option to wait for the next deal to come along.
Image All rights reserved by Chris Downer.