Chris A Watkins

Funding Business Growth: The Angel Investor – what you need to know.

Many young companies reach a point in development where growth is seriously slowed by lack of funds. Finding the best way forward can be difficult and a wrong choice can be disastrous.

The term angel investor was originally coined in show business where it was applied to a wealthy individual who would take the risk of privately backing a Broadway show when conventional funding failed to materialise.

Today the label is commonly applied to describe an individual who invests private wealth in a business. Nearly a quarter of a million angel investors are currently estimated to be providing around three billion pounds to UK business each year. The cumulative pool of investment from this quarter stands at around twelve billion pounds, a figure that exceeds all UK venture capital lending and is equal to a full seven percent of the total UK bank business lending. A very clear indication of just how much UK business craves growth funding sourced from the private sector.

As a group, angel investors are a major source of business financing, however the average angel will reject ninety-seven percent of funding applications made, selecting only those with real attraction.

Why would you consider Angel Investor funding for your company?

Angel investors usually operate in the gap area where entrepreneur sourced funds have run low and the business is not yet mature or large enough to attract venture capital investment. Not every company is going to find itself in this particular position. Indeed if lack of investment is merely slowing growth, it may be better to extend the expansion program by a few extra years and allow time for growth through profit rather than seek external investment. It is when a company needs rapid expansion to capitalise on a market position that external investment becomes most attractive.

How would external funding from an Angel Investor affect the management of your business?

A typical angel investor will have extensive management experience. The investment will be private money and the investor will seek to use personal skill and experience to ensure a thirty-five to forty percent return on capital. In short, the angel investor will want an active management role. How this will affect your company and your management method is crucial to the decision on whether an angel investor is a valid way forward or not.

After around five years, most angel investors would wish to withdraw leaving your business with a broader trading base, larger turnover and greater profit. Provided all has gone well, the investor will have made his target return, benefited from tax relief under the UK Enterprise Investment Scheme (EIS) and enjoyed the experience. Through the hands-on role he should have contributed something to the development of the management team and it is how the management team cope with this learning process that will determine how effectively the time ‘in harness’ with the investor was spent.

Of the many questions to ask before commitment three of the most prominent must be –

1. How crucial is the funding to the business?If you are not entirely sure that extra funding and extra growth is essential, it is questionable if any external finance is required. 
2. Can the management team accept the inclusion of a powerful influence?A seasoned angel investor will have his capital return, enhanced by the EIS tax relief, as a prime motivator. However, he may well have many secondary motives built into his business ethic. It would be unwise for any young entrepreneurial management team to expect an angel investor to be overly aggressive or predatory in business approach. Expect a high degree of moral and social regard in his decision making. Additionally, he will be very experienced in the handling of people and situation, so an ‘easy ride’ in management conflict situations is not to be expected.
3. Are the management team willing and happy to learn?If the management team can accept the period of involvement as a time of learning, the process could be of great benefit to all concerned.

If, when all of the above have been considered, you still see your best path as external funding, to be provided by an angel investor, prepare your business case very carefully. With only three percent of requests finding favour, your proposal will need to be very sound and very exciting.

Good luck

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