If you’ve ever watched Dragon’s Den, you’ll be familiar with the concept of private individuals investing in start-up businesses in return for an equity stake in the business. Investors like this are sometimes called business angels. Typically, they are successful people who get a thrill from business and enjoy supporting entrepreneurs. Often, as well as providing capital, they help the startup in other ways, for example by mentoring the owner/manager and/or taking a seat on the board.
Last year, members of the Halo Business Angel Network — an umbrella organisation for the development of business angel networks in Ireland and Northern Ireland— invested around €13.5m in 50 early stage companies. The amount of finance provided to individual companies was typically between €50,000 and €250,000.
Halo is just one of a number of business angel networks. Others include the Irish Angel Investment Network, the European Business Angels Network and the Global Business Angels Network.
Why investors reject your pitch
While angel investors can be a useful source of finance for early-stage businesses, most investment proposals are rejected. Often, this is because the proposer has not sufficiently thought through their business plan. A useful way to prepare a proposal for investment is to think about what the investor is likely to want in exchange for the capital they plough into your business. Usually, this will include:
Reason to invest: An angel investor will want to be convinced that your business idea is viable. Be ready to make a strong case backed up with appropriate facts and figures to persuade them to invest.
Investment structure: Angel investors usually want an equity share in your business in exchange for their investment. Make sure that your business is structured to accommodate this requirement.
Return on investment: Early stage businesses are risky and many businesses fail. In order to justify the risk they take when investing in your business, an angel investor will want a good return on their investment. Typically they will expect a better return than they would get if they were to invest their capital on the stock market.
Management skills: Investors will want you to be able to demonstrate that you have the leadership and management skills needed so that your business can achieve its goals. You need to think carefully about your business strategy and ensure that your operations and key performance targets and correctly aligned to achieve your business goals.
Mentoring: The investor may want an opportunity to get involved in your business, perhaps through mentoring and/or a seat on your board of directors.
Exit strategy: An angel investor will expect to agree in advance the strategy for their exit from the business. For example, they might want you to agree to a trade sale for cash or to purchase their shares in your business within an agreed time frame. Don’t forget to take into account the Capital Gains Tax implications (CGT) as part of you exit strategy
Despite having a good business idea, the right structure and all the conditions for a viable business, where many pitches fall down is because the owners fail to understand the financials. One of main reasons for this is because business owners decide to do their own bookkeeping as a way of keeping costs down which is a perfectly legitimate concern. However, what we see is that in nearly every instance where a client has decided to maintain their own accounts, there have been material errors to the extent that it would have been more cost effective to hire an accountant from the outset.
The demands of small businesses change as they grow. If you work in a particularly demanding industry, you need someone with specific experience of the financial challenges you would be facing in your sector and a range of packages and options that can grow with your business. Being able to access financial records that are completed as you go means any financial decisions can be made with confidence. With all the facts and figures at your fingertips, you’ll always have an accurate picture of the business.
As always, take professional advice so as to optimise your chances of making a successful proposal. At Brady & Associates, we see time and again that good preparation is the key to success. Contact us to find out how we can help.