How can start-ups attract Angel Investment?
Having recently joined SETsquared as Hub Manager for the new digital business support hubs, it struck me that one of the most important milestones that we will guide start-up companies to, will be raising investment.
As a serial entrepreneur, and having raised over £48 million in venture capital (IPO, VC, Angel, Crowd) and taken one company to public flotation, I’ve certainly learnt a lot about investors along the way and what they are looking for in a potential deal.
If you are an early stage digital business looking for funding, it’s likely that your first investment will come from an Angel Investor. There are some popular misconceptions about how to attract an Angel Investor and why that investor will want to invest in your business.
So why do they invest?
Well, let’s think about the back-story for the typical early stage investor. Most Angel Investors are successful entrepreneurs or retired executives who have expertise and want to help other entrepreneurs set up a successful business. They have a broad-spectrum of investments from property and the Stock Market, right through to boring ISAs. It is likely that 90% of their available investment funds are tied-up in these traditional sources. The remaining 10% is play-money – losing it won’t dramatically affect their lifestyle. It’s this pot that Angels will tap into for highly volatile opportunities, such as your business. Of course, they will want to take full advantage of SEIS and its older brother EIS, but tax incentives are not the main draw. The main reason why an Angel will invest in your business is to be involved in the exciting early stages where their skills and experience can help steer the management team through the inevitable hiccups as the company grows. For this reason, there are some practical factors which determine whether an Angel will invest in your business:
- Location – if you are based more than 1-hour away from where the Angel is based then it is less likely that the Angel will want to invest.
- Skills – if the Angel’s skills and expertise are not relevant to your business then there are few opportunities to mentor the management team.
- Personality – because the Angel will want to get involved, they must like you.
- Industry – a wealth of valuable contacts if the Angel has worked in your industry.
In essence, Angels want to be useful to you and your business. Therefore, your business plan and projections are less important to the Angel than the relationship. The Angel will need to see that you have the passion, the intelligence and the personality to drive the business forward. However, any serious investor will need three basic documents.
Three Basic Investment Documents
- Presentation Deck (no more than 10 minutes).
- Executive summary (one page is best).
- Your financial projections (no need for a detailed 5 year Balance Sheet but you will need to clearly demonstrate your understanding of the main business drivers).
The Angel will need to see five key factors in your pitch
- Can you quickly (in 60 seconds) articulate what your business does?
- Who is the target market?
- What problem do you solve?
- How big is the market opportunity? Corner shop or global?
- How strong is the competition and why will you win?
- What is your revenue model? Key here are the basic assumptions upon which your model is based.
- Strong management team with a demonstrable track-record. Identify skills gaps which can be filled by an Angel.
- Your intention to drive toward some form of liquidity event – sale or IPO. Investors aren’t keen on investing in a business where there is little opportunity to realise a financial gain.
If you have an idea for a digital start-up or already run one, find out more about the support available from SETsquared