Business Angel investors are those who put in their money in a variety of businesses and are seeking a better return than they would obtain from conventional investments. Most of these are successful tycoons who would like to help other entrepreneurs start their own business. Generally they offer a link from the initial stage of the business and carry on to the point that the business would require the level of funding those business angel investors would have to offer. Business Angels could either be individuals or a part of a group or organization who invest in businesses with a high growth potential. Apart from the money, Business Angels also provide their skills, experience and contacts. The Business Angels have a very strong commitment. Business Angels do not have a direct connection with the company before they invest but they usually have experience of the industry or the sector that the company operates in. The bulk of Business Angels make investments for financial reasons. However, there may be some additional motives other than investment. One of the main intentions could be to play an active role in the entrepreneurial process. Some of the business angle investors get pleasure and satisfaction from being a part of the success of a good investment and derive their fulfilment by creating something new and enterprising. Business Angels are an important but still under-utilised source of money for new and growing businesses. A typical Business Angel makes one or two investments in a three-year period, either individually or by linking up with others to form a syndicate. Some Business Angels invest more frequently. There are an estimated 18,000 angel investors across the UK, and around £800m is invested by Angels on an annual basis.
Advantages of Business Angel Investors
- The business angle investor can easily make an investment decision without difficult assessments. However, there will still be a need to draw up a professional and tailored business plan.
- The personal experience of these investors helps in taking critical decisions. Their prior knowledge of working in a small business or running their own business establishments can be utilised effectively.
- The businesses investors usually concentrate within a small geographical area hence have a better local knowledge.
A few business angels are qualified to have their investment funds matched by the government under its Enterprise Capital Funds. This could be a great advantage to the new enterprise.
Disadvantages of Business Angel Investors
- The disadvantage of business angels is that they do not make investments on a regular basis and may either miss an opportunity or find it difficult to comprehend a new one. It may also be difficult for them to identify a new opportunity. To obtain best results it is important that the new company and the investor angle have a good relationship.
- Finding out an appropriate business angel investor can take a lot of time, sometimes even months.
Expectations of the Business Investor
All angel investors have their own demands and expectations from the business.
- Nearly all the business angels wish for a position in the board and are looking for a consulting role.
- Regular and proper communication in the form of reports. These reports could be monthly, quarterly, weekly updates or anything that is mutually decided.
- Almost all the angel investors hope to get a stake of 5 to 20 percent in the business.
- Some would like securities, which could be in the form of either common stock or preferred stock with clear rights and liquidation preferences over common stock. While others ask for changeable debt, or redeemable preferred stock, which gives a better exit strategy for the investor. This puts the company at the risk of repaying the investment plus interest.
- Moreover, this repayment may endanger financing for future since the new sources will not want to use their investment to help out the prior investors.
- It is important to decide on the Future representation of the board of directors.
- Angel Investors often demand that important decisions not be taken without the angel investors approval. These include selling all or substantially all of the company’s assets, issuing additional stock to existing management, selling stock below prices paid by the investors or creating classes of stock with liquidation preferences or other rights senior to the angel’s class of security.
- Business investors might ask for a price protection. This implies that in case of an anti dilution they would get more stock lower price.
Factors to be considered by the Business Angel Investors
- It is advisable to seek legal opinion for gauging documents, formulating the deal and drawing up agreements. Accountant or Corporate Financier would be able to help in assessing business plans and also provide tax advice on the Enterprise Investment Scheme. It is important to study the Financial Services Authority Act to decide upon the kind of certification required.
- It is recommended to decide how to achieve a return on investment. The generally accepted options are from dividends, fees and capital gains.
- It is important to obtain all the information on the entrepreneur and management team’s background and track record.
- Investing together with an experienced Business Angel might prove to be beneficial in some cases.
- Lastly it is imperative to consider the exit option if things do not turn out as planned.
Above all it is extremely important for both the business angel investors and the upcoming companies to spend time and strive to form a relationship with each other. Since both of them will be spending a number of years together, utmost trust and faith is vital.