Each year, close to 450,000 businesses start up in the UK. In fact, 99 per cent of British companies are SMEs and 96 per cent have 9 employees or less.
There’s a wealth of exciting new ventures being launched every day – but sadly, 40% shut up shop within 3 years.
So why does this happen?
Occasionally, it can be due to lack of proper planning in the initial stages – or simply having a business concept that doesn’t work in reality.
Often, however, the problem is financial. Three quarters of start-ups use personal finance to get their businesses going. When the money runs dry, the big question is – where to turn to next?
It seems astonishing that so many start-up businesses prefer to use their own money (or cash from friends and family) rather than exploring the other options available.
Of the brave few that do seek financial support from external sources, the majority head straight to the local bank. Indeed, bank overdrafts account for 26 per cent of all external finance, and credit cards 22 per cent.
As for lending and equity investment, such as using a Business Angel? A miniscule 2 per cent!
As you can see, Angel investment is a seriously under-tapped financial resource for SMEs. This is a real shame, as they can add significant value to your business – and not just in terms of money.
Part of the problem is that Angel Investors are often misunderstood – or worse still, not even known about.
Small or start-up businesses are understandably reluctant to place their trust in an investment system they don’t understand.
Popular programmes such as BBC2’s The Dragon’s Den have created a public conception of investors as terrifying, ruthless business-owners, hell-bent on tearing chunks out of the poor person pitching!
Thankfully, the reality of angel investment is different.
Simply put, angel investment is equity finance. And it works like this:
1. You, the business owner, arrange a time to pitch your business to an angel investor.
2. They listen to your pitch, and if interested in investing, offer you equity finance (normally from their personal funds) to help you grow your company.
3. In return, an investor will most likely want shares in your business.
An Angel investor would generally expect to see a return on their investment in a period of around 3 to 8 years, so they’re in it ‘for the long-haul’ and are certainly not seeking to make a swift profit and run.
Occasionally, an Angel may join forces with other investors and form a syndicate, or they may simply choose to invest alone.
In addition to their money, you’ll also benefit from their business expertise.
Some investors will take an active role within the company – for example, helping you to market the brand, or offering advice on sourcing suppliers or extending your product range.
In other instances, they may take a more passive role. There’s no ‘one-size-fits-all’ approach… every investment is different.
Here’s a handy step-by-step guide to getting Angel investment:
1) Do your research. Many Angels specialise in certain areas, and ideally, you’ll want to pitch your business to an investor with relevant experience and expertise in your niche – for their sake and yours. So, if you’re setting up a fashion retail company, don’t expect a science / tech investor to be particularly interested!
2) Know where to look. There are plenty of places you can track down Angel investors – some better than others. You’ll find a number of organised networks online; some of which may focus on a particular sector, others on a specific geographic location. The Business Funding Show in February 2016 is a great chance to meet several Angel investors in one place.
3) Prepare your pitch. Although some investors are happy to talk to businesses via Skype, most want to meet them in the flesh. In either situation, you’ll need to prepare a winning pitch. This needs to quickly identify the following:
4) Prepare yourself! In addition to investing in your business, Angels will also be investing in you. You need to ensure that you demonstrate your relevant skills, past achievements, your passion for the project, and realistic understanding about what’s involved to make the business a success.
In order to secure investment, preparation is tantamount. Your pitch needs to demonstrate exactly why you and your business are destined for success, and it needs to intrigue and excite the Angels!
Angel investors are ideally suited to many different types of business ventures.
However, every company is different, and seeking out an angel to finance your start-up might not be the right approach for your specific needs.
Generally speaking, if you’re happy to give up a share of your business in order to help it grow, then Angel investment is a viable option for you.
Another distinct advantage of working with an Angel is that you benefit from their expertise and know-how – which again, can fire-up the growth of your company.
However, if you’re looking for a sizeable investment (for example, over £500,000), then Angel investment is unlikely to be suitable.
In this instance, venture capital companies are a better option.
If you’re looking to get finance quickly – again, Angel investment might not be the best way to get it.
Most Angel investments take a while to come through, as investors like to take the time to examine your business plan, meet with other people involved in the process, and so forth.
And of course, the big thing to keep in mind is that you’ll be effectively giving up a portion of your business. If you’re not happy to share out your company with others, Angel investment definitely is not for you.
If you do decide to seek Angel intervention for your business, you’ll need to work hard to show them that you’re a viable investment option.
In addition to preparing your pitch to perfection, you’ll need to do some number crunching and research to prove you’re a serious contender.
It’s not enough to state that you plan to achieve an annual turnover of £1m by year 5. You need to show your Angel exactly how you plan to achieve this.
Likewise, don’t come up with woolly assertions about what your target customers like. You need to conduct market research and gather some solid facts and figures to back up your claims.
You’ll need to have exact figures to hand, detailing how you’ve grown already (if you’re an existing business).
Be prepared to answer some tricky questions about finances, marketing strategies, levels of sales and more. Angels will want to see that you know your stuff and are fully prepared to take your business further.
As Angels Den, a service connecting businesses with investors, states: “Many UK businesses are unaware of the funding options out there or are concerned that they’ll have to begin repaying the money before they can establish the business.”
However, as the company emphasises, Angels “provide patient money, that doesn’t have to be repaid for several years until the business exits, usually through a trade sale.”
In 2014, although only 2,600 UK companies took the plunge and sought out Angel investment, a total of £1.393bn was paid out to them.
There’s plenty of investment opportunity out there, it’s just a matter of proactively asking for it!
To meet some of the UK’s most influential investment-related companies, such as Angels Den, Crowdcube and UK Business Angels Network, plus some of the most well-known business leaders in the country, secure your ticket to the Business Funding Show today.