At Empiric Partners we provide our clients with an honest and unbiased assessment of suitable funding options, then work closely with them to guide them through the funding maze to help maximise their chance of success. Here’s some sage advice about equity funding from Mike Duff, our funding specialist.
If you are thinking about equity funding from a Business Angel, then the first question to ask yourself is whether this is something that could suit you? Giving up a share of your business will typically mean relinquishing some control and being challenged on business decisions, which you may be used to making for yourself. Some Business Owners welcome and embrace this as a positive step for their own personal development and a huge opportunity to catapult the growth of their business; “a smaller slice of a big pie is better than a bigger slice of a small pie”. Whereas those that like doing things their own way and who struggle to “let go” will not suit working with a Business Angel, if they are unable to take advantage of the benefits they would bring to the table. Although Business Angels can be relatively patient with their investments, they are ultimately looking to realise a return, so you will also need to adopt a suitable exit strategy such as a trade sale, usually within five years.
The next question, which is of equal importance, is whether your business and more importantly the offer that you are putting forward might attract a Business Angel? The word “attract” here is key, since this is very much a buyers’ market. It is not uncommon for Investors to select only one or two businesses out of every 100 applications, so to be successful you will need to tick all the boxes and stand out from the rest.
So, what are the key factors that Investors are looking for?
According to research, top of the list is not your product or service; 90%+ of Investors cite the entrepreneurial team and their skills and experience as an important factor. Investors know that the road to success will always contain some potholes and road bumps and therefore passion, drive, tenacity, skill, and experience will often be the key differentiator. The next important factor (89%) is the potential of the business and revenue model to achieve growth and scale, followed by the expected returns. As a rough guide, a return on investment of 5x-10x within 5 years is the usual expectation. The next factor is a realistic valuation (72%); pre-revenue or early stage businesses that base their valuation too heavily on overly ambitious and unsubstantiated forecasts are likely to fall at this hurdle. This is followed closely by the potential for the business to disrupt the market. Other notable factors are the referral source (43%), the potential for the Investor to contribute skills and experience (39%), exit strategy (28%) and the potential for social impact (25%).
If your business passes these suitability tests and you feel that Angel Investment is a good fit, your next challenge is to prepare to go out to the market. Two of the key documents that you will need are a robust business plan with supporting financial forecasts and a well-presented pitch deck. You will also need to consider your business valuation and your funding strategy as it may be better to spread the funding that you need over a certain period and have several funding rounds. Moreover, there are significant tax benefits available to Investors who invest under SEIS (Seed Enterprise Investment Scheme) or EIS (Enterprise investment Scheme) so it is important to take appropriate advice about qualification and registration for these schemes. Lastly, you should prepare an elevator/short pitch so you can succinctly explain the opportunity to a potential Investor.
The next step is to start your search for investment. As we have already seen, referrals can have a positive influence on Investors so a good starting point can be reaching out to your personal network. Otherwise, the most likely source will be an Angel Investment group. Your local group may be a good place to start, but some groups invest more money than others or more frequently (“deal flow”). They may prefer to lead or follow or have a bias to SEIS or EIS. Groups may have a strong preference to location, growth stage, and business sector, so it is worth doing your homework. Most groups will ask you to complete an application form and submit your supporting documents. If you pass the initial screening process, you will then either be invited to meet with an introducer or you will be invited to pitch at their next pitch event which is often held on a quarterly basis.
Angel investment can be a great solution for high growth businesses. It is unlikely to be a quick process and will typically take several months. Most Investors view this as high risk, high reward, but the same can be true for the entrepreneur since the process will often involve its own investment in the form of both time and money. Those with passion, drive and determination will be most likely to successfully navigate the process, so to some extent there is an element of natural selection taking place.
If you have specific questions for Mike about Business Angels, give him a call on +44 (0)1256 338 440.