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Business Angel Financing – The Complete Lowdown on Obtaining Business Angel Finance
When funding options are scarce, business angels pretty much end up partaking the role of fantasy world angels, and become a messiah of sorts for startups – providing them with the funding that they so desperately require.
This is particularly true because traditional sources of business funding such as banks or even venture capitalists do not loosen their purses with ease. While the banks demand sufficient security for the money they are going to be lending, venture capitalists are never too keen on doling out smaller amounts, particularly if the amount that you seek happens to lie between the range of £10,000 to £250,000.
In such a scenario, the business angels obviously come all too handy as they are neither too finicky about the amount that you require, nor do they demand any particular security against the money that they would be giving out to you.
If we are to reflect on the type of businesses most suitable for obtaining funding from business angels, they are most likely to have the following characteristics:
- The money required is relatively modest, in the aforementioned range of £10,000 to £250,000. Usually, funding beyond £250,000 is provided by venture capitalists, unless you happen to get yourself an entire consortium of business angels who are together willing to dole out a sum in excess of £250,000.
- In return, these business angels usually expect a shareholding in your business. One advantage in case the funding you eventually obtain exceeds £250,000 would be that obtaining funding from banks at a later stage would become a whole lot easier. This is because the equity that you obtained would reflect positively on your balance sheet.
- Both the business owners as well as the business angel would be looking to work in close cooperation with one another. This would definitely not be akin to interference on the part of the angel, but rather a facilitation of the everyday business processes. For instance, the business angel could bring with him domain experience and knowledge which the business owner may not have. Similarly, the business angel might also be able to bring to the table, useful industry and business contacts which would render the job of the business owner a whole lot easier. Eventually, it would be all about synergy rather than about any one entity coming in the way of the other.
- Needless to say, the business angel would be investing in a business with the earnest hope that the investment would yield magnificent returns. Although it may not be very easy to define or quantify what may be considered to be spectacular returns, usually, at least a 20-30% rate of return each year is considered to be very good. Also, such a return is unlikely to come from day one or even the first year of operations of the business, but over say the first 3-4 years, the business should be in a position to consistently deliver the aforementioned rate of return.
- Irrespective of whether the business in question is a startup or an established business looking to expand with the help of business angel financing, it is essential that the business owners demonstrate adequate acumen and expertise in the domain they are getting (or have already got) into. The possibility of obtaining business angel financing gets suitably enhanced when the aforementioned acumen and expertise is clearly seen to be there. In that case, business angel finance is easily made available, both for capacity expansion of existing businesses as well as startup costs of new businesses.
- The presence of a strong and capable management team would be absolutely essential to obtaining business angel financing. Business angels always look into the credentials of the business team they are going to be financing and if those credentials seem weak, it is unlikely that any funding would make its way to the business. Also, this proficiency cannot be established merely on paper; it has to be backed by sufficient evidence in the form of say, previous businesses which were run by the same team or individuals from the same team, and they were able to bring about rapid growth and profits during that stint.
- Finally, as much as an angel loves his protégés, when it comes to business angel financing, every business angel would definitely like to have the option of being able to exit the business open. This may or may not have anything to do with the performance of the business; rather, there might be fresh prospects on the radar of the business angel who would be looking to invest the money invested in your venture, into that one. Also, even after the exit, the business angel, as indeed the business owner might like to keep the door open for strategic consultation which the angel is likely to happily impart. Exits, as and when carried out, could take the shape of a purchase of the angel’s interests in the business either by the business itself (in the form of a repurchase) or by a third party investor. It is also possible that the business would be looking to go for an outright strategic sale whereby the proportionate proceeds from the sale would be given to the angel, as due.
Summing up, there are various expectations that business angel investors usually have from the businesses they are probable to fund. As would be obvious from the above, none of the expectations are unreasonable, and rather seem to be quite logical as well as applicable to any sort of funding received from any other source. In fact, funding sources such as banks tend to be much stringent in terms of the criteria on which funds are given out. Considering the relative ease with which business angel finance can be obtained, this is an option you would definitely not want to ignore – if you are an entrepreneur looking for funding, and always pursue, whenever you get the opportunity.