Four Tips on Attracting Angel Investment

DFN: Highlights four ‘things’ that helps attract a VC to a potential business investment, 1) Management 2) Fair Valuation 3) Direct access to angel by prospect 4) EIS Relief. FYI, this is written in the UK; the UK has a “Enterprise Investment Scheme” or EIS. Its an investment tax credit for angel investors given by the H&M Revenue & Customs (Britian’s IRS) to promote taking investment risk.

Four Tips on Attracting Angel Investment (BNET) By Julian Goldsmith

September 28th, 2009 @ 5:28 am

Anyone harbouring the dream of starting up their own business mayu face a tough time getting outside investment in the near future. But there is a general belief that conditions are improving and it’s worth thinking about securing the funds you need from a business angel, or high net worth individual.

Mike Weaver, CEO Beer & Partners (B&P), an organisation that specialises in connecting new businesses with angel funding, is keen to extol the angel’s virtues. Individual investors, he says, have a mentoring attitude and will want to put something back into the business world that made them successful.

B&P tends to raise capital of between £100,000 and £2m for new ventures — plugging the gap left by venture capitalists, which tend look for bigger deals.

According to Weaver, the VC market is struggling to secure capital. Once they have it, they are under pressure to invest quickly, and in the best deal possible.

Angel investors generally have a longer lead-time in the business, typically five to seven years, so they pick their deals on that basis. Should the company run into trouble, an angel will likely use their skills to help the business recover, rather than looking for a quick and painless exit. Weave has this advice for anyone interested in securing angel funding:

1. Present the management team clearly. Describe the company’s long-term plans from the outset. Angels are interested in the people that make up the business, not just the business plan.
2. Valuation is key. Companies in the past have been tempted to over-value themselves, resulting in an over-expectation of returns from investors. Being realistic about your company’s assets and potential will keep your investors happier in the long run.
3. Approach direct investors through a network — not exactly a surprising attitude from Weaver here, who warns that financial regulations around funding can expose an entrepreneur to some of the investors’ liabilities, if they don’t approach the matter in the correct way. An intermediary can help smooth this process.
4. Securing EIS relief is important to investors. It helps to secure a return on investment and protects them from some tax expenses on exit.

So, are there any instances where a management team wouldn’t want to approach business angels? This sort of funding is very specific and it may not be applicable for every would-be business leader.

The management needs a clear exit plan. If you want to build a lifestyle business over 20 years, angel investment is not for you. Debt may be a better option than giving away a share in your business. If you want complete control over your new venture, or feel you have no need of the sort of mentoring an angel offers, it’s not for you. Angel investors deal in a specific range of funds. If you need capital below £100,000, you may want to approach family and friends first. According to Weaver, angels typically want to see a financial commitment from the management team anyway, so that the financial risks involved in setting up the business are shared.

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