How To Become A Business Angel

Practical advice for aspiring investors in unquoted companies

Richard Hargreaves

• Verlag: Harriman House
• Jahr: 2013
• ISBN:
  9780857192875
• Auflage: 1
• Thema: Business
• Thema: Entrepreneurship

Becoming a successful angelAngel investors are the most important source of capital for UK companies seeking up to £2 million in funding. This importance to the British economy is recognised by the government, which means that attractive tax breaks are available to business angels. Added to this, helping start-up ventures with money and mentoring can be satisfying and fun. If you have considered taking advantage of these tax incentives by making angel investments, or find the idea of providing capital to entrepreneurs - and the potential financial rewards of doing so - appealing, then your starting point should be How to Become a Business Angel.Richard Hargreaves has 40 years' experience making investments in unquoted companies and as such is well placed to guide those who are new to the area through the process. He knows what to look for in potential deals, the risk-reward structure angels should demand, the times when legal advice must be taken and the pitfalls to be wary of. In a concise, readable manner, he provides practical guidance to all aspects of investing in unquoted companies and gives numerous invaluable case studies from real-life deals so you can see how angel investments work in practice. You will learn:- Whether angel investing is right for you- How to find and assess opportunities - What investment terms angels require- How to manage investments you have made and resolve problems that arise- How to exit from investments- Lessons from real-life deals that went well, and badly, through detailed case studiesIf you are looking to build a portfolio of investments in unquoted companies, wish to learn more about the technical side of investment, such as share capital structures and investors' legal rights, or wish to invest your capital in entrepreneurial ventures in the most effective for both you and the entrepreneurs, then this book is for you.

Part B: Investment Opportunities

Chapter 3: Finding Investment Opportunities

Introduction

Finding good opportunities is key to good performance from your portfolio. At any one time, there are many entrepreneurs looking for funding and many angels interested in investment opportunities; the problem is finding each other, which is the challenge this chapter addresses.

Angels find deals in many different ways. Some meet an entrepreneur in a pub and invest in an enthusiastically described venture, some are invited to invest in a venture by a friend or financial adviser, and others have a structured approach and work their contacts or join angel networks or syndicates to access a stream of opportunities. This chapter urges you to take a structured approach.

Matching entrepreneurs and angels

Matching angels and entrepreneurs is a bit like young people dating – both parties are looking for a compatible partner, sometimes desperately. But there are differences. In the case of dating each party is broadly looking for the same thing, but this is not so in the angel world.

The entrepreneur wants money. He knows it is hard to find and presents his ideas in the way he feels will maximise his chances of success. If he not only gets the money he seeks but also gets the benefits of added value that is a bonus. But, first and foremost, he wants money and the terms, though important, are less important than the money itself. He believes his venture will succeed and so he sees the investment risks as low. He is not choosy about his investors and he is in a hurry.

The angel, on the other hand, wants to invest in several deals he feels comfortable with. He is aware he will lock his money into the venture and may lose all of it. He wants to spend time asking questions and considering the risks of failure and the chances of success. He may have value to add post investment. So he is choosy about his investments and he is in no hurry.

Due to these differences, there is an inevitable tension between entrepreneurs and angels (or any other investor) when a deal is being done and it is important not to allow a tough negotiation to damage the forward relationship on which success depends.

The importance of deal flow

Deal flow is a term used in the VC industry to describe the number of investment opportunities which a fund sees and is often quoted for a particular period.

The more opportunities you see, the more likely it is you can chose the ones you really like. As I stressed in Chapter 2, a portfolio of at least ten investments is needed to increase your chances of the occasional big winner. Only then can you expect angel investing to become financially rewarding.

The UK Business Angels Association (UKBAA) suggests on their website that “a typical business angel makes one or two investments in a three-year period”. If that is so the typical angel is not making enough investments to optimise his chances of an attractive overall return. By way of comparison, a professionally-run venture capital fund may take five years to invest its pool of capital in 20 deals. That is four a year and all VCs will tell you they screen hundreds of opportunities – though they would say that to justify their fees to investors.

The commonest complaint angels make when surveyed is that it is hard to find a broad range of opportunities – they can obviously only invest in what they see. Investing in the occasional opportunity that passes your way (which is what the “typical business angel” cited by the UKBAA appears to do) is fundamentally more risky than sifting through a steady flow of ideas looking for the gems and making ten or more investments.

So you should do everything you can to increase your deal flow.

How to find opportunities

Contacts

As with most things in business, the single best source of opportunities is your own contacts. As soon as people know you are interested in seeing deals they will start to come your way. Some of your friends probably already make angel investments and may introduce you to some of their portfolio companies.

Introductions from contacts will usually be pre-screened in some way so your time is less likely to be wasted than it would be with cold introductions.

The unsolicited deal

Once you invest in the unquoted company area, you will be targeted by mailshots. The companies behind these mailshots scour public records such as the Companies House returns of shareholders in VCTs and individual unquoted companies. As a result you can expect cold and often unwelcome mail to drop through your door.

One common type of unsolicited mail is a prospectus inviting you to invest in an unquoted company. Unfortunately, as I pointed out in the previous chapter, this legal framework often hides a poor and expensive investment opportunity.

Most unsolicited deals are best avoided.

The internet

Today a Google search is the most common starting point for many people’s enquiries about anything. If you make a search of “business angels” or something similar you will you will find many helpful leads.

Cautionary note

Before discussing internet searches further I need to offer a cautionary note. There are strict legal rules about offering financial investments to the public (I explain these under ‘FSA rules’ below). They apply to all forms of communication.

I have looked at several internet sites offering investment opportunities in unquoted companies. Many of these are not regulated by the FSA – they are obliged to clearly say so if they are – and as such they are operating illegally. This means there is a risk they could be closed down at any time.

However, a bigger concern it is that as they show a blatant disregard for the law then you might expect them to be equally cavalier with investors. So beware the unregulated deal promoter.

Crowd funding

There are a growing number of websites offering investments in private companies to individuals. Such websites are examples of the current fashion for crowd funding where an individual is invited to invest in equity or debt in amounts from as little as £100. As a result, the money sought by a company can come from many investors, which is far from ideal.

Such funding is becoming popular with companies seeking money because venture capital, debt and angels are hard to find.

All crowd funding sites need to be viewed with the greatest caution by the prospective investor. Most are not authorised by the FSA and are thus operating illegally as they promote investments to the public. All that I have looked at offer poor protections to the investor and inadequate disclosure of important information. Many people would see them as a means of gambling rather than investing. So beware.

Angels dating companies

There are several websites which operate in a similar way to personal dating sites.

The usual format is the investor registers free and the entrepreneur pays to advertise his venture. Some of these sites are interesting sources of information on the subject of investing, but they do not seem to attract the better deals.

From my own research, they are characterised by entrepreneurs looking for one or two investors for a venture that does not seek to be very scalable. And there is often an air of online Dragon’s Den about the whole thing, so I fight shy of these sites.

LinkedIn

LinkedIn is Facebook for professionals. It had 160m members by autumn 2012. Anybody can join free and put their profile on the site and you can search through other member’s profiles in many ways. Members can then build a network and communicate with that network, but the general rule is that a new member of your network has to accept a connection to you before you can send them emails.

I know people who use LinkedIn to run or benefit their business – recruiting is a good example. If you pay for the service you get more freedom of usage. You can then advertise and reach others with whom you are not already connected.

You can also join ‘Groups’ and communicate within that group. There are three LinkedIn Groups which seem to me to be of partic...