Once the business plan has been finalised, the first stop considered by most new businesses when looking for Business Start-up Capital (banks), Angel finance will normally be the next port of call. Despite this fact, few entrepreneurs really understand what Angel investors look for and expect from businesses in which they potentially may invest. The fund raising process is becoming ever more competitive and being able to meet investor requirements the first time around will increase your likelihood of raising the capital you need.
After a recent Bos Beraad, mostly attended by angel investors, the issue of what Angel Investors look for in companies that they fund and what the various processes they go through when assessing entrepreneurs was discussed.
Most of the investors present agreed that the recent economic down turn resulted in them re-assessing the way they both look for and asses the businesses they get involved with. This does not mean that they are not still very actively looking for investable businesses. As also discussed in a number of previous meetings it was obvious that most investors seem to have a clear goal of how much they wanted to invest each year and what the returns were that they expected from their investments.
Angel Investors typically invest anywhere from R200,000 to R2 million, preferably in a first or second round funding, for which they normally will acquire around 15-30% of the company depending on the structure of the deal. The Angel Investors are often successful entrepreneurs themselves who are able to offer significant strategic value to the company in addition to the financial capital that they are providing. All the panellists agreed strongly that the strategic value that they can provide is often times more important than just the financial capital.
What do they look for?
Few entrepreneurs win over angel investors by simply sending them a business plan. Most investors agree that face to face meeting are best, after all, wouldn't you want to meet someone who may be taking a large amount of your personally earned cash? As an entrepreneur you won’t go into business with someone that you have not met and the same applies here. For this reason Angel Investors are more likely to look at your idea once they have met you at a business networking event or personal introduction. In South Africa these event and introductions are now commonly held by organisations such as Investors Network.
Another issue discussed was; is it better to go after 5% of a R1 billion market or go after 50% of a R100 million market? The clear consensus on this question was it always is better to go after larger market share from smaller markets. A company with only 5% market share has no sustainable strategic advantage, and with out that advantage, they are an unattractive acquisition or IPO candidate.
As far as the size of investment is concerned, the Investors seemed to agree that they mostly get involved with investments of R500, 000 to R2.5 million, normally in exchange for around 15 – 30% of the equity in the company. A 5-10 times return on investment would require that they earn R5 - R10 million on every R1 million invested. If an Angel Investor were to provide R1 million in capital for 25% of the company’s equity, your company would need to be acquired or successfully file an IPO for R20 - R40 million.
The Investors I spoke to know these numbers inside and out, so what they look for in your business plan, is the probability of your company being able to reach at least a R20 - R40 million valuations within 5 – 7 years. One way they evaluate this is based on market analysis, market size, and expected market share. Remember, most investors want companies that are going to dominate the market that they are entering, not simply obtain a 1-2% market share. If you are entering a R50 million market, your company would need to obtain nearly 50% or greater of that market to reach the required valuation. The market you are entering must be large enough for you to confidently obtain a large enough market share and valuation within a reasonable amount of time.
One thing that was very clear from most discussions and conversations during the 2 days we send there was that the Investors want entrepreneurs to have a clear plan for how they are going to spend the money that they raise. They want to know that you acknowledge the core gaps in your business, whether it is key personnel, technology, or other missing, but required component. Done say that the money will be paying you salary for the next year. The investment needs to contribute tot he building of an eventually value of the business. Spend the money on marketing or market research. Spend it on expansion or to technology, something that is likely to have a proven impact on where the business is going. Angel Investors know the gaps in your business, but if you can acknowledge those gaps and assure them that the money you are raising will be used to fill those gaps, you stand to build strong credibility among the investors.
When evaluating your need to raise capital, ensure that your market and financial projections meet the minimum requirements that Angel Investors have (5-10x return on investment). Be certain that you’re projections include a solid, but realistic, market share penetration in the market that you are entering and analyze how the money raised will be used to fill key strategic gaps in your organisation.
What is the process?
The angel investment process commonly takes around 3 – 6 months from the time that you first present your pitch to actually receiving the cash. This may sound like a long time but as an entrepreneur going through the process I can assure you that it will be well worth your while. Not only are you raising the cash need to take your business tot he next level but you will a) be going through all your business processes with a fine comb to ensure everything is on track, making improvements along the way and b) you'll be working with someone who has been there, done it and got the building bank account to show for it.
It was clear from most conversations that the Investors assigned plenty of value to entrepreneurs being upfront, open, and honest about anything. Angel Investors do substantial background research on your business, your market and financial assumptions, your customers, and your personal history. This should be seen in a positive light rather than being protective about your business. Can you really ever have too much information on your market and business potential?
Investors conducting their due diligence will find the gaps, in your business, and will due extreme due diligence on you and the management team. It is critical to raise potential issues upfront and acknowledge them yourself with your potential investors. Entrepreneurial companies are not supposed to be perfect, but investors do want assurance that entrepreneurs are trustworthy and are able to acknowledge and bring forth potential issues and challenges before they are uncovered later.
The Angel investors you are likely to meet and surely those who I have com across both at the Bos Beraad itself and the may other networking meetings provide start ups the capital they need to scale their venture, but more importantly they will help and guide you strategically to help ensure that you meet the financial milestones that you and they believe your company can achieve. Be sure that you come prepared, have accurate and ready answers tot he questions I mentioned above and be honest and open about your business and where it’s going.
For alternative sources of business start-up capital click here
