Business Angels – on a wing and a prayer!
21/03/2012 Leave a comment
We are slowly working our way up the funding ladder, looking at the various options available to businesses to raise finance to fund growth. Having taken a closer look at crowd funding and grant funding now it’s the turn of Angel funding!
Business angels, like their celestial counterparts usually have superior expertise, networks, market access and investment capital. Accordingly they are well-placed to invest in high-risk, early-stage, ventures by taking a portion of their portfolio to provide emerging companies with seed and start-up capital. Their goal is to achieve significantly higher returns than from other asset classes. Best of all, from the entrepreneur’s perspective – “angels” contribute their time and experience, as well as offer introductions to valuable contacts.
You may have seen their kind in action on the BBC’s “Dragon’s Den” Unfortunately “benefaction” is not their primary objective!
Angel investors are often found among family and friends, so before searching further afield, make sure you have approached supportive family members …and any ‘rich uncles’ that maybe lurking! The capital provided by angel investors can be in the form of a once-off investment or, as more often is the case, by them providing ongoing financial and managerial support.
How do you find an angel investor?
If your family isn’t that well heeled, or well-connected, there is always the internet, where there are a large number of websites/platforms that focus on identifying and then, introducing suitable investors to would-be seekers of finance.
Whilst Australia has yet to develop a significant population with the risk appetite for angel or venture-capital investment, as exists for example in the US, the Australian Association of Angel Investors (AAAI) nevertheless estimates that in 2010 Australian angels invested >$1 billion in 5,000 early-stage businesses (source: AAAI website), a significant source of business funding by any measure.
Another option is to communicate with relevant industry specialists in State Government for useful referrals e.g. the Queensland Department of Employment, Economic Development Innovation.
Other avenues to try include:
- Angel Resource Institute
- Australian Investment Network
- Brisbane Angels
- Sydney Angels
- Melbourne Angels
How do angel groups work?
Angel groups pool their resources, expertise and money. An example would be the Brisbane or Sydney Angel’s groupings. In certain instances e.g. Sydney and Melbourne these groups have built up collective investment funds, called “side-car” funds – which comprise a pool of capital of approximately $10 million. Collective investment allows these groups to take on larger investments and increase their level of support and involvement for entrepreneurs (by enabling a deeper due diligence, greater awareness of industry risks and valuations and also business opportunities between groups nationally and internationally).
How much capital can be raised through Angel Investment?
Typical angel investment round’s raise between $350,000 – $400,000 (source: AAAI website) – depending on the investment case, although most companies have more than one investment round.
What do angel investors expect from you?
Before preparing your pitch – you will need to consider the following key issues – all of which need to be properly researched and presented:
- Business plan
- Have you developed a professional and comprehensive business plan that articulates your key business strategies, and which will stand up to the scrutiny of some of the harshest ‘judges’ you will encounter?
- Market size
- Are the projected revenues in your product category large …and growing?
- Is this market… or can this market be worth several hundred million dollars?
- Target customer
- Do you have an identifiable niche and / or market segment?
- Is there a demonstrable and significant demand for your proposed products or services?
- Sales strategy
- Do you have a plan for your products and services to achieve widespread market penetration?
- How will you do this as efficiently as possible and if so will that strategy require the creation of an internal, direct sales team, or will you rely on external channel partners?
- Do you understand the market and can you demonstrate that adequately – both in a local context as well as a global context?
- Have you identified your potential competitors?
- Do you understand what differentiates your products and/ or services?
- Do you understand your positioning?
- Are there sustainable (true) barriers to entry, which will help your company to maintain its competitive advantage/s?
- Have you proved the concept, and the market demand, for your product or technology?
- Can these factors be confirmed with independent data, or by objective experts or Universities / CRC’s that operate in your field?
- Have you built a strategy and action plan to commercialise the technology?
- Protected intellectual property
- Have you taken professional advice on this highly specialised area of International law?
- Have you protected key items of intellectual property?
- Have you performed an exhaustive search to be sure that you are not infringing on patents or trademarks held by third parties?
- Profit potential
- Can you demonstrate how high margins (+15%) and consistent cash flow growth will be achieved?
- Exit strategy
- Do you have a clear exit strategy that will enable potential investors to generate a return of at least ten times (we said this was high risk / high return investment!) within the next five-six years?
- Financial projections
- Have you developed achievable and realistic/well-considered human resource and financial projections – which will at their most basic, outline all the key constraints and assumptions, as well as the illustrative income statement, cash flow and balance sheet?
Angel funding is not for the faint-hearted, its only viable for businesses and business owners where they have the required degree of knowledge and sophistication to provide the in-depth research and analysis expected, then implement a plan in accordance therewith.
There are always a few war stories around which can be quite useful to bear in mind when preparing your pitch! Included below are a few ‘irritations’ raised by business angels:
- The worldwide market is $XXm and we only need to get Y% to achieve our projected turnover!
- Start-up, no track history, no firm orders – projecting exit in Y5 of say 20x investment.
- Management team expecting big salaries, without investing own money and offering little equity.
- A well prepared plan let down by wholly unrealistic growth figures. It doesn’t look impressive, it just brings the credibility of the whole plan into question.
- Valuations that don’t sufficiently recognise investor risk and value the opportunity almost as if realising it is a formality.
Questions typically asked of Angels with regards to people issues:
- Can I get on with them?
- Will they listen?
- Will they take advice and act on it (small point but they want to spend my money)?
- Do they have experience in the sector?
- Do they look like they can run a business or are they really looking for a job?
Let’s conclude by summarising in terms of the key aspects of our funding ‘checklist’:
- Cost of funding – angel investment usually requires giving up a significant stake, in exchange for the investor’s skills and capital. It is thus the most expensive funding, if your business is successful, however without it you may not have a business at all!
- Ease of access – never easy to arrange …and only capable of being obtained after proper preparation of a suitable business plan, and presentation which may need to be pitched to many groups and/or individuals. The process can be time consuming and stressful for those that do not like the ‘interrogative’ style of some potential investors. Furthermore there is no guarantee of success, even in instances of a superb product/idea.
- Speed – very variable, and entirely dependent on counter-parties – you may need some patience!
- Security – none, unless a hybrid debt instrument is used to provide the return. Angel investors usually take-up equity and are thus risk co-investors, not debt financiers.
- Consequences – You will be responsible for reporting back to your co-investors on a regular basis and also being held accountable for delivery in terms of the business plan.
- Size – typically from $25,000 to $500,000.
Please feel free to contact Lattice Capital on email@example.com for advice regarding angel Investment, both locally (within Australia) and also from offshore.
Next week we’ll work our way a little further up the funding ladder and take a closer look at the Australian Small Scale Offerings Board (ASSOB), how it works and what is involved in an ASSOB listing!