If you’re looking for a third party to inject cash into your business, the first question you have to ask is: how much of a stake in your company are you prepared to give up?
Mike Weaver, chief executive of business angel network Beer & Partners, observes: ‘Many businesses look for debt finance in the first instance. But the bottom line is that if you don’t have assets, you’re not going to get any finance.
‘Business angels tend to be seen as the last option because people are reluctant to give away any equity. But you have to be sensible and ask yourself which is better: owning 100 per cent of nothing or 50 per cent of something that’s worth £1 million?’
Speaking to investors
William Berry, founder and managing director of web marketing agency Net121, notes that you have to be crystal clear about what you want from your backers. He says: ‘I managed to get seed funding for my first company but had to part with 20 per cent of the equity in the process. Two years later, we were in a position to buy that stake back.
‘Early-stage funding can be a useful source of investment for a number of reasons. For instance, if you sell a stake in your business, it means that everyone has a vested interest in seeing it perform well.’
Grow your business
Levi Roots relinquished a 40 per cent stake in his business on the BBC’s Dragons’ Den to Peter Jones and Richard Farleigh. Their financial backing and advice along the way has helped Roots get his Reggae Reggae Sauce get into Sainbury’s, Waitrose, Morrison’s and Asda. ‘It’s the fastest selling condiment in Sainsbury’s in its whole history,’ he says.
A home-made sauce that was popular with the locals on Brixton market and regulars at the Notting Hill Carnival has now sold over a million bottles. Reggae Reggae has become a brand in itself and Roots knows he has some big decisions to make.
‘Now it’s about clarity and moving forward. The main thing I have to do is keep my integrity intact because I started off with a good product and I have to continue in that way,’ he says.
Another consideration is to regain full control of the company. ‘Who knows, I may even buy back my shares from the Dragons. That is in my contract – I managed to slip it in there,’ says Roots. ‘But then why should I want to do that? Peter Jones is one of the greatest guys I’ve ever met.’
Who are business angels?
The experience and expertise that an angel may bring to your business can be invaluable, although many prefer to be hands off (otherwise it could interfere with improving their golf swing). According to Weaver, the typical angel is 45 to 65 years old, has taken early retirement and is looking for a bit of excitement.
‘So you may get a better valuation if your company has sex appeal or something the angel can relate to from a short pitch. If you truly understand your business, you should be able to explain it succinctly in two or three minutes,’ he says.
See also: Top UK angel networks for your start-up
Angel Funding – The ten deadly sins
When it comes to trying to raise finance, angel funding could be the blessing you’ve been looking for. Here we give you our top tips on what to avoid in order to get that god-sent investment.
- No skin in the game
Julian Ranger, founder of angel group iBundle, says: ‘If someone is asking for £200,000 but they want to take out nearly half of that for the partners – essentially what they would be earning if they were not entrepreneurs – then I always say no. I need to see that they’re prepared to put themselves on the line. If the person coming to me is fairly young, then I’d be prepared for them to take more. But if they are in their 30s or 40s, then I’d expect them to take virtually no salary as they should have built something up already.’ - Lacking team spirit
Don McLaverty, director of Oxford Investment Opportunity Network, says presenting a united front is essential. ‘Make sure that you have a cohesive management team. I’ve actually seen people arguing in front of the investors before and that looks really bad. If you are presenting as a team then it’s important that you come across as united,’ he counsels. - Bad sums
‘Being unrealistic about what they are asking for is another bad sign,’ says Ranger. ‘A lot of investors would say asking for too much is a problem, but for me it’s actually the other way around. They need to be realistic about how much they will need once the product is actually launched, as they’re not going to start bringing in revenue as soon as it is on the market.’ - Papering over the cracks
Ranger says not admitting your weak spots is a bad sign. ‘It often depresses me that people have a good product, for example, but a really bland marketing strategy. I don’t mind if they’re honest, because we can always bring in people who have that sort of knowledge, it’s when they are blustering that it bothers me.’ For Ranger this suggests they have a real lack of experience. ‘It’s not so much that I wouldn’t trust them, but rather that they are kidding themselves. Of course, there is always an element of kidding yourself in being an entrepreneur, but to kid yourself over the basics is a big problem.’ - Stingy stakes
Michael Weaver, chief executive of angel investors, Beer & Partners says: ‘If the investees are unrealistic about the stake they’re giving away, then that will also set off warning bells. They should be able to appreciate the risks the angel investor is taking. The usual split for us is one-third to the inventor, one-third to the management team and one-third to the investor – which normally leaves the business with a two-thirds controlling stake.’ - Over confidence
Weaver says arrogance is a serious turn off: ‘Yes, you need to be sure and confident, but telling the investors, who probably know more than you do, that they are wrong is never good as it shows you will be too difficult to work with.’ - No back-up plan
Adds Weaver: ‘When you ask someone what the risks are and they say there aren’t any, that’s a worrying sign. You shouldn’t be afraid to identify risks in the meeting and talk about how you plan to address them.’ - Dressing down
‘Although what you wear isn’t so important these days, you can never go wrong wearing a suit as it shows respect. Jeans and a t-shirt might put some people off,’ says Weaver. - Informal affairs
McLaverty warns against ‘odd deals’. ‘You should choose your bedfellows wisely. For example, there are investors out there who will say they can’t put the cash in, but they can provide you with an empty building at a special deal. This may seem like a good idea for your business, but you should always think what is it that you really need.’ - Pitching problems
‘If an investee doesn’t know every aspect of how the business is going to reach success in two years, then they are not going to be a good investment opportunity,’ says McLaverty.
Related: Get funding from the Angels
