Looking for funding from a business angel? If so, it pays to know what business angels are looking for in return for their money – this is an investment, not an act of philanthropy. The answers to that question may surprise many entrepreneurs.
A new paper on business angels in the UK, published by the University of Glasgow and its Adam Smith Business School, paints an intriguing picture of a sector about which relatively little is widely known. Most strikingly, the report’s authors, Colin Mason and Tiago Botelho, argue that the business angel community is evolving rapidly. While the widespread perception of angel investing is of wealthy individuals making one-off commitments to businesses that are lucky enough to find them, the reality is that this is a much more organised and structured community than it may appear.
“Once a largely invisible activity that individuals undertook on their own or with ad hoc groups of associates, angels are now increasingly joining together to invest as part of managed angel groups,” Mason and Botelho conclude.
From the perspective of businesses looking for investment, this has important implications. First, these structures have broadened and deepened the funding that business angels are able to offer – there is more money available as a whole and companies in need of large investments have more chance of getting them. Second, we are seeing a formalisation of the investment process – entrepreneurs now have to convince groups of angels to invest, rather than relying on the instinctive decision of an individual angel. And third, the existence of large networks of angels, as opposed to individuals operating in isolation, should make it easier to find angel funding – or at least to find someone to ask for money. That is, visibility has improved.
The million dollar question then is what makes the difference between success and failure in a funding pitch to a business angel. Helpfully, Mason and Botelho have asked business angels exactly that – they spoke to the decision makers behind 473 angel investments, asking what had been the principal factor in their decision to invest. Three answers dominated:
- Above all, business angels focused on the market and product space in which the business was operating – in other words, what it actually does. Almost two-fifths of angels – 39 per cent – said this was the key factor.
- Next came the people running the business, cited by almost a third – 31 per cent – of angels. That is, the angels wanted to be convinced that the individuals asking for their money were to be trusted to put it to good use.
- In third place, albeit someway behind, came the attributes of the business. Just over 16 per cent of angels said the shape the business was in was the key factor for them.
This, then is the recipe for successfully hooking an angel investment. And it’s also interesting to look at the ingredients angels were less interested in. Only a tiny number focused on the entrepreneur’s business plan, for example, despite the huge amount of work companies often put into projections and forecasts. Very few angels cared about the existing finances of the company. And almost none said their ultimate exit strategy had been a consideration.
Moreover, the angels’ answers changed when asked about investments they had turned down. Here, they were most likely to have said no because of the people involved in the business. Its market and attributes were pushed down into second and third place respectively.
The lessons for entrepreneurs are clear. If it is in the right market and product space, your business has a good chance of attracting business angel funding, but if your own credentials as a business manager and leader are unconvincing, the odds lengthen considerably. To put that another way, your personality, charisma, skill and experience won’t secure funding in isolation, but a lack of them can certainly put it at risk.
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