Many entrepreneurs will need investment from business angels to help them grow their business. There is much more to successfully pitching for that investment than we see on Dragons’ Den – but of course we only see edited highlights, whereas the pitches take much longer. So what do businesses need to do to optimise their chance of success? And what should angels be looking for?
As both an advisor to businesses – including two who’ve appeared on Dragons’ Den – and an investor myself, I’ve observed first-hand the key factors that make a business stand out from the crowd and offer potential for a good return on investment to business angels.
Tips for entrepreneurs
Explain the vision clearly
Business angels see many pitches, so entrepreneurs need to make theirs stand out for the right reasons. They may think that they have an amazing business concept, but unless they present it well, others may not take the same view. Angels will be attracted by someone who can explain clearly the idea behind their business, their vision for taking it forward and the market it addresses. For example, is their idea disruptive, or original, or does it solve a particular problem?
Not everyone is going to have the vision, drive and single-minded ambition of Steve Jobs, nor the extrovert style of Richard Branson, but potential investors will be impressed by someone who can explain in an exciting yet realistic way the potential for their business to grow. Angels will also be impressed with personal commitment, demonstrated through an entrepreneur putting their own money into the business, and time they have invested in developing their product or service.
Set a realistic valuation
Despite their enthusiasm, entrepreneurs must be careful not to over value their business, as this quickly makes potential investors see red. They need to have a realistic expectation of what stage they are and therefore what value they actually have. If a business has an established revenue stream or a product that has been patented – perhaps alongside interest from a major customer – then it will be much more valuable to an investor than one still at the prototype stage.
Some angels will be passive investors, but an investor who was previously successful in the sector can often bring far more in term of experience, contacts and general business acumen. If a business has barely begun, potential investors should be viewed as more of a partner, and the equity the entrepreneur is prepared to surrender should reflect that.
Demonstrate robust financial planning
Potential investors need to be convinced that their money will be valued and treated with respect. They want to understand where sales will come from, which requires a business plan, a realistic sales forecasting system and preferably the first order delivered and paid for.
Entrepreneurs also need to address questions about whether their idea can be copied or protected, and what systems they have in place to handle growth. Depending on how long the business has been operating, angels will be impressed by an accounting system producing management accounts, three year financials (including P&L, balance sheet and cash-flow forecast), and professional advisers already engaged.
The new investment may be required to take the product to market, but entrepreneurs should provide details about what marketing they have done so far. This should ideally include a clear brand identity, a fit for purpose website, social media profile and customer testimonials.
Tips for business angels
Understand the idea
It is vital that the entrepreneur can explain their idea clearly and succinctly. If they can do this, they will potentially be a good sales person too. If the angel finds it difficult to understand the business proposition, and its market potential, this should immediately raise a red flag. Angels should look for a good idea that is well packaged and with a level of risk that is acceptable.
If the idea fits with their previous experience, or with other businesses within their investment portfolio, this may enable them to offer time and experience as well as funds – and to negotiate a better share of the equity.
Look for both skills and passion
Look at the people who are behind the business. Angels should look for both passion and the skillset to take the business forward. They may not be able to take any money out of the business for two to three years, so need to be confident that the people they see will be able to deliver the planned growth. If there is not a team sheet in the pitch deck with information about who has set up the business and their reasons for setting it up, angels should be prepared to dig deeper. The story behind the business could even provide a potential marketing angle.
It is also important to consider how well they relate to the individuals leading the business, as the two parties are likely to be working closely together for several years, particularly if the angel plans to be an active investor. Would they actually like to work with the people pitching to them?
Consider both growth potential and exit strategy
As an investor the angel is giving up their personal funds and taking a risk, so needs to be convinced that the business is targeting a market which can generate a profit and hence that the risk they would be taking is minimised.
They also want to know how they are going to get their investment back, hopefully with some profit, commonly referred to as an ‘exit strategy’. This means asking questions about longer terms plans, such as whether there are competitors who are likely to buy the owner out, or another business which the company would complement.
There is no secret to obtaining angel investment funding. The key to success is for each party to understand what the other is looking for and to prepare for the pitch accordingly.
Phil Mitchell, director, Harbour Key
For more information visit www.harbourkey.com