Send me an angel

Matthew Nolan

AS BUSINESS bounces back, essential funding remains elusive. The recent upheaval has left banks unified in their conservative views on approving business loans. Venture capital funds are also constrained in funding businesses, stifled by an inability to secure vital wholesale debt facilities.

This leaves businesses that are seeking growth capital in search of an angel. Not the imaginary type but the investing kind, though they have been almost as hard to find in recent years.

Angel investors are typically high net worth individuals who have successfully been in business for themselves, giving entrepreneurial experience and management credibility to spot and profit from investment opportunities in other businesses.

During the downturn angel investors like banks and venture capital funds stopped investing in businesses. But unlike their counterparts, angel investors are back and in a big way, hungry for investments that seem well priced in comparison to just a few years go.

The difference is that angel investors are using their own substantial financial resources to make the investment, with less dependence on borrowing and no reliance on the assessed value of the business being invested in. The ease of dealing directly with the investor is another bonus that can cut through layers of bureaucracy and rigid policies.

As seasoned business people, they understand business cycles and know the best time to buy is at the start of an upswing in the cycle. Many consider that time to be now.

Angel investors actively seek opportunities that are in industries or fields they have personal experience in. Knowing this can help refine your target list and should be a key question when first speaking with potential investors.

Angel investors can join your business at any stage, but are more likely to invest in start-ups or early stage companies with high growth potential.

Whilst angel investors are traditionally associated with IT companies and biotechnology, they can now be found investing in a wide range of industries that include manufacturers and retailers.

Adding value

An angel investor doesn’t just want to give your business a cheque and then wait for repayment like a traditional funder. They seek to add value through joining the board, facilitating meetings with their contacts, mentoring business management and providing insightful governance.

The average angel investment in Australia last year was almost $100,000, with investments ranging from $50,000 to millions of dollars, providing meaningful capital for a share in the ultimate success or failure of the business.

Contrary to first impressions, most angel investors look for people to invest in, not businesses. So make sure you have the right management team in place.

As prudent entrepreneurs, angel investors are particularly attracted to cash flow positive businesses or those that can achieve this point quickly, minimising the need for additional capital investments. Those with existing products and sales are also attractive.

Remember to keep your business valuation realistic. It might be a $100 million business to you, but it will take substantial resources, hard work and a little luck to make this a reality.

Before meeting with potential angel investors, have a clear pitch that encapsulates your company vision, product, and the key people you have in place to make sure you’re ready for both investment and expansion.

The share of equity required in return from investment in your business varies, but generally sits between 20 per cent and 51 per cent. There isn’t a set number or formula, the amount of equity depends on the considered business value, growth expectations, market size and potential upside in comparison to the size of investment being made and amount already invested by other parties.

Just like second hand car buyers, some investors will want to get a full independent expert to inspect your business, whilst others will go with their gut and commit almost immediately. There’s no right or wrong way, but be ready to answer the hard questions, which may come from their lawyer and accountant. Also be prepared to provide patents, financials, shareholder agreements, employment contracts and relevant commercial contacts to assist them in gaining an in-depth understanding of your business and its risks.

Angel investors have been characterised as acting a little like lemmings with their investments. So if you’re lucky enough to secure your first investor, it may not matter how small they are, their vote of confidence could quickly snowball into a number of investors providing the overall amount you’re seeking.

To find a suitable angel for your business try one of the growing numbers of angel investor groups in your area or contact the Australian Association of Angel Investors.

Matthew Nolan appears courtesy of PPB Advisory, Australia’s leading independent Strategic and Advisory practice. He has over 20 years experience in banking and finance, specialising in SME management. Send him your questions at matthew.nolan@me.com