G. Business Angel Networks

'Business Angel' is the common name for private wealthy individuals who invest in small and medium sized businesses. Recently the BBC TV series 'Dragon's Den' has led to the nickname 'dragons' but I still prefer the term 'angels' as it sounds a lot more friendly and positive – which is generally what these people are like.

On the part of the angels, an investment in small companies is one element of a diversified portfolio of savings and investments offering different risk/reward ratios. They'll have money tied up in pensions, savings accounts, bonds, blue chip equities, investment funds and so on. But they have enough money in the lower risk lower reward category – they want to diversify their portfolio by investing in some higher risk higher reward opportunities.

They are likely to have some business experience themselves, and want to use this knowledge and experience to find an opportunity that others have missed, and find it at an early stage, when it's relatively cheap to get on board.

They may have gained this experience through building a business of their own, or they may have been very senior in a large organisation that paid them well. The business angels who invested in my business when it was getting off the ground included three entrepreneurs (each with different core skills and contacts), a senior lawyer from a big law firm who had taken very early retirement, an accountant (again, at a very senior level in one of the big five firms), and a director of a large international publishing company.

This highlights another important point: you can assemble a group of angels to invest in your business to put together the funding you need while spreading the risk for them. This also has the advantage of bringing in extra brains that are experienced in different areas. The spread of experience and expertise among the business angels I invited to invest in my business was no coincidence, and I have benefited hugely from their input beyond their simple financial investment.

There are approximately 18,000 active business angels in the UK, investing an estimated £500m each year. They tend to invest amounts between £5k and £100k in companies they get involved in, but you can assemble a syndicate of more than one angel to raise larger amounts.

The National Association of Business Angels has conducted research into the success rates of investments by their members, and found that 20% had an average annual return of over 50%, while 33% made a total loss, with most occupying the middle ground of a small loss, break-even or a smaller return.

Angels are seasoned business-people who aren't scared by the level of risk involved. They are one of the steadiest and most supportive sources of finance available to your business. If you run into trouble the banks will be running the other way, demanding back the money they lent you, but business angels will generally run to help you, rolling up their sleeves to do what needs to be done.

Funding Types

Equity:

They will buy shares in your company for an agreed amount. The amount of shares is often discussed in percentages.

They will be looking to raise the value of those shares by growing the company, and then being able to sell those shares for a large profit.

If the company is profitable they are also likely to want to be paid dividends, a way of distributing some of the profits of the company to shareholders in a tax efficient way.

You should have a formal shareholders agreement.

Who's it suitable for?

This is suitable for start-ups that have a real opportunity, established proven businesses that are looking to grow, and troubled businesses that are being turned around.

It's not generally suitable for 'lifestyle' businesses – if you plan to open just one shop or one restaurant for example, as that doesn't offer enough growth potential to give a high enough reward for the risk involved.

If you're looking for amounts of over £2m you may want to consider venture capital instead.

What do they want?

Every business angel is different, and has different aims for their investments. That could include any combination of the following:

• An investment that has a chance to make a big return on investment
• A company that fits their interests or experience
• A company they feel they can contribute to, adding value through advice and contacts as well as money.
• A company registered, or that will register, under the Enterprise Investment Scheme (EIS) (see the chapter on negotiation for details) so they can maximise their return and minimise their risk through tax breaks.
• An element of fun, excitement and challenge.
• A company based locally.
• Something to do! Sometimes they have retired or been made redundant with a large payoff and they are looking to create an investment and a job for themselves. This isn't always a good thing, as they may tread on your toes or try to take over in their enthusiasm. Make sure the boundaries are clear.

How do you get it?

Business angels are often members of angel networks or clubs. Your local Business Link will be able to tell you about the clubs in your area, or try searching the web. They hold regular meetings and invite entrepreneurs to come along and pitch their ideas.

Contact the administrator of your local group and ask for the chance to present. They are likely to want a meeting with you first.

Different groups have different ways of funding themselves. Some charge the angels to be members, some charge the entrepreneurs to present, some charge a fee based on a percentage of any deal that is done, others want to take shares in your business (be wary of this), and some are free because they are organised or supported by government agencies. Make sure you find out about any small print, and are happy with it, before you commit to anything.

Once everything is agreed it is likely that a one page summary of your business proposal will be circulated to the angels to attract them to the meeting, then you will give a brief presentation at the meeting.

Any angels who are interested will then come and chat to you and request a copy of your full business plan and a further meeting for you to give your full presentation.

Once the angel has seen your plan and your presentation, they will be likely to conduct some research of their own. If they decide to invest after this, they will negotiate with you on the amount to be invested and what they will get in return. We will look at this negotiation in more detail later.

Once they commit they will write you a cheque, or wire the money into your account, and you will issue them with shares in your company in return.

What to ask

• What can you bring to the business on top of the money – in terms of contacts, knowledge etc?
• Have you invested in other small business before? Can I chat to them?
• What do you want to get out of this investment?
• How long a period are you prepared to invest for before seeking an exit?
• How important are dividends to you, or do you prefer to reinvest in the business?
• How hands on do you want to be?

Pros/cons

+ They can bring knowledge, experience and contacts.
+ If they have a good track record it will impress other funders.
+ Most angels really understand how businesses work and will help you navigate through the more difficult times without panic.
+ Angels can often be great mentors.
- Some angels are simply looking for a new toy to play with and will keep meddling in your business.
- A few angels have sizeable egos and forceful personalities. Their success may have made them brash and uncompromising. This can cause friction with you and the rest of your team.

Useful Contacts

www.venturesite.co.uk
www.angelinvestmentnetwork.co.uk
www.advantagebusinessangels.co.uk
www.bestmatch.co.uk
www.eban.org
www.nationalbusangels.co.uk
www.beerandpartners.com