Author: Jim Riley Last updated: Sunday 23 September, 2012
Business owners often report that company finance of £10,000
to £250,000 can be very difficult to obtain - even from traditional
sources such as banks and venture capitalists. Banks generally require
and most venture capital firms are not interested in financing such small
amounts. In these circumstances, companies often have to turn to "Business
Business angels are wealthy, entrepreneurial individuals
who provide capital in return for a proportion of the company equity. They
take a high personal risk in the expectation of owning part of a growing and
Businesses Suitable for Angel Investment
Businesses are unlikely
to be suitable for investment by a business angel unless certain conditions
(1) The business
needs to raise a reasonably modest amount (typically between £10,000
to £250,000,and is willing to sell a shareholding in return for financing.
Equity finance of over £250,000 is usually provided
by venture capital firms rather than business angels. The exceptions are when
several business angels invest together in a syndicate or when business angels
co-invest alongside venture capital funds. The sums raised can easily exceed
£250,000. Raising finance in the form of equity (shares) strengthens
the business' balance sheet. Banks (or other lenders) may then be willing
to provide additional debt finance.
(2) The owners and
managers of the business are willing to develop a personal relationship with
a business angel. This is important. Typically, business angels want hands-on
involvement in the management of their investment, without necessarily exercising
day-to-day control. This relationship can be a positive one for the business.
A business angel with the right skills can strengthen a business by, for example,
offering marketing and sales experience.
(3) The business
can, and is prepared to offer the business angel the possibility of a high
return (usually an expected average annual return of at least 20%30%
per annum). Most of this return will be realised
in the form of capital gains over a period of several years.
(4) The business
can demonstrate a strong understanding of its products and markets. Some business
angels specialise by providing "expansion finance" for businesses
with a proven track record, or in particular sectors. This enables an already
successful business to grow faster. Business angels are also a significant
source of start-up and early-stage capital for companies without a track record.
A business plan based on convincing market research is essential.
(5) The business has an experienced
and professional management team - as a minimum with strong product and sales
skills. If there are weaknesses in the existing management team, a business
angel can often provide the missing skills or introduce the business to new
(6) The business can offer the business
angel the possibility of an exit. Even if the business angel has
no plans to realise the investment by any particular date, the angel will
want the option to be available. The most common exits are:
- A trade sale of the business to
- Repurchase of the business angels shares by the company.
- Purchase of the business angels shares by the companys directors
or another investor.
Finding an angel
Many contacts are made informally.For example: personal
friends and family; wealthy business contacts; major
suppliers and clients of the business. Investors can also be found by
formal angel networking organisations. Many of the most active business
angels use these networks to find out about interesting investment opportunities.
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