Angel investing
Angel investors provide financial backing for early stage and
start-up businesses in exchange for an ownership stake in the company. The
likes of Facebook and Uber broke into the mainstream thanks to this mode of
business funding.
If a start-up performs well, both parties would reap the financial
rewards; conversely, if the venture goes south, the business angel would not
expect their initial investment back.
There's an additional advantage of using an angel investor. A rule
of thumb suggests that around nine out of 10 start-ups fail.
But business angels often go beyond pound and pence investment and
lend their well-honed business expertise to younger firms. And it's this that
really matters.
Bill Morrow, founder and chief executive at angel-led
investing platform Angels Den said: 'We see over 100 business plans and
applications every day for angel funding and each one asks us for the wrong
thing.
'They all ask for money, whereas in our ten years of experience
what they really need is mentorship, business experience, contacts and then the
money.
'Raising capital is part of the process, but we are more
interested in ensuring that they are equipped to survive three, four, five
years down the line and what will kill almost every business is what they don't
know, they don't even know.
'This where the clever money that sophisticated investors bring,
comes into its own.'
This method of fund raising also enables start-up business bosses
to raise capital without the need for collateral or the expectation of capital
repayment and interest.
It all sounds good but there are a few important details that
company chiefs should note.
Those who hand over a slice of their start-up are essentially
waving goodbye to a chunk of their future earnings.
It is therefore absolutely imperative for founders to weigh up
whether the value that an angel can offer justifies the demanded equity stake,
or whether it is worth walking away from the deal to pursue other funding
options.
Elsa Caleb, small start-up team manager at the Federation Of Small Businesses, said although business angels generally have a higher tolerance to risk than banks when it comes to investing in small business, they generally have higher expectations.
This expectation, compounded by the fact that many business angels
have earned their stripes through developing a business from scratch, manifests
into a higher performance burden on the start-up in receipt of angel funding,
she added.
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