Entrepreneurs turning to business angels will find the devil is in the detail of their pitch if they want seasoned investors to offer them some cash.
Just like race goers, business investors back people not horses – which means if they like the management and think they can work with them to bring a business on line, then they stand a much better chance of winning funding.
So what do business angels look for when they weigh up a deal?
The same checklist applies to a £100,000 seed enterprise investment scheme (SEIS) as to a multi-million pound enterprise investment scheme (EIS) or venture capital trust (VCT), and if an entrepreneur has an idea of what investors are looking for, they can adjust the pitch accordingly.
Entrepreneur’s personal checklist
Here are a few top tips gleaned from business angels:
- Make sure directors understand what working with a business angel means so the venture gets off on the right foot
- Ensure directors have money to lose if the deal goes wrong so they can’t walk away if the going gets tough
- Check directors know how to run a business and are familiar with controlling costs, working out their margin and who is likely to buy their product
- Does the management team have all the necessary skills to make the business a success? If not, do they realise any shortcomings and have a place to add skills?
- If the investment is relatively small – less than £100,000, expect a grilling about why relatives, friends or acquaintances can’t come up with the cash. Do they lack the wherewithal or is it they do not have confidence in the pitch?
- Draft a business plan and understand how the figures work out. The business plan is the foundation for the investment. If the plan is wrong, so is everything else. Business angels will want to see how the figures were arrived at and expect the directors will pay the consequences if the deal goes pear-shaped.
- Don’t seek finance without a shopping list. The funding is to develop the business, not to line pockets for the directors. Business angel finance is hard won, so make it work. Link director salaries to performance, so they gain if the company does well and suffer if it doesn’t.
Giving a warranty
The business angel is likely to seek warranties from the directors to underwrite the accuracy of financial figures and to confirm nothing has changed pending the injection of the cash.
The warranty is evidence for the business angel to take the directors to court to get the investment back if some dodgy dealing has gone on.