What makes a business angel invest? Exec investigates the initial funding stages of angel finance

Source: Exec Digital UK

Date :07/01/2008 13:40:10

We’ve seen Dragon’s Den - but surely there’s more to a business angel than reality television’s redux version? Exec looks at the determining factors which make business angels invest.

By Rebecca Waters

If you think that business angels are just wealthy private investors who provide equity funding then think again. “At the end of the day angels provide more than just cash,” says Alex Macpherson of Octopus Ventures Ltd. “The crucial element comes in providing the relevant knowledge and skill-set.”

Business angels have so to speak, ‘been there, done that’; they have, as Macpherson says, all the knowledge and experience that a young business requires. The money is merely an ingredient of the entire investment package.

Aside from the obvious, a business can benefit from the breadth of experience and knowledge in management and business that the angel brings. “They’ve got a lot of experience in business and most of them have been pretty successful,” says Neil Mackay of Advantage Business Angels. “They’ve learnt a lot of lessons along the way and they bring that with them,” he says.

Assessing the plan

To gain initial funding, the business has to pitch the infamous business plan; but what makes a successful pitch and what do the angels themselves seek in these entrepreneurial businesses?

In short, a first-rate business plan.

A business has got to have a plan that is ambitious enough to interest the angel, one that shows a profitable but realistic opportunity. “They want it to be a really powerful plan,” says Mackay. “More importantly, does it have the right team to execute it? Does it have the right management?”

The team is critical and most vital to a successful investment. A potential investor needs to assess whether the team have the sort of drive and determination to make a business successful and whether they can actually fulfil the business plan that they are proposing – does the team demonstrate a strong understanding of the product and market?

The aim is to develop a personal relationship. An investor also needs to know that they can work with them. As Macpherson explains: “There are lots of serious concepts that don’t succeed because the team isn’t right.”

Buying a stake

The process following the initial investment is “quite detailed and quite extensive” explains Macpherson. “We will initially assess the business and then look at who from our investor group can give us the knowledge that we require of a particular industry in order to help us with our evaluation.”

Through assessment, investors can determine whether they want to take an opportunity on and will assist the business to move forward. After this early stage, the business will then have to make another pitch to potential investors.

“We’re bringing both the skills and the financial capital. What you want to be able to do is draw upon a complete cross section of skills as and when you need it. That’s what is very important in driving that business forward and delivering good returns.”

Alex Macpherson is Chief Executive of Octopus Ventures Ltd, a Private Investor Group that was formed in 2000 by a group of successful entrepreneurs and businessmen in order to provide capital and business expertise to small, fast growing companies. Since receiving FSA approval in 2000, the Octopus Ventures team has invested £14.9 million into 25 companies and has achieved an annual rate of return of 27 percent based on BVCA guidelines. Its investments range from £500,000 to £2 million of equity in investee companies with an enterprise value of under £10 million.

Octopus Ventures is a division of Octopus Investments, one of the UK’s most innovative and fastest growing investment companies. With 11,000 investors and almost £400 million under management across its range of products, Octopus Investments has dominated the VCT market since 2004 and was recently voted “Best VCT Provider of the Year” for 2007 by IFAs at the Professional Adviser Awards.

To visit the website, click here

Neil Mackay is Managing Director of Advantage Business Angels. The company focuses on finding investment for early stage businesses: individual entrepreneurs; young growing companies or re-starts of older businesses based on new ideas.

Since commencing trade in 2003, the ABA has taken on 319 companies to help secure investment in their businesses and secured £15.4 million in 109 investments.

To visit the website, click here