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Business Angel Funding – What to Expect?
When on the quest for obtaining business angel funding, one can surely expect a few trials and tribulations at the outset, but eventually, it is almost always a smooth ride till the end.
Unlike funding through other sources such as banks or venture capitalists, business angel funding tends to be more personalized, with angels playing an active role in the welfare and day to day operations of the business. Also, they are almost never in it for ‘quick cash and carry’ and rather are in the fray for the long haul. The pressures faced by entrepreneurs who obtain funding through other sources, especially loans from banks, bear on them heavily in the form of debt, often resulting in them losing the passion for which they started their business, and blindly chasing profits. On the other hand, when the enterprise receives business angel funding, the angel in question tends to treat it like a protégé of it, and nurtures it suitably, in tandem with the owners of the business, not letting them to get overawed by his presence.
That said about what others can expect from business angel funding, what about the expectations of the angels themselves? If they are going to be investing in a particular business – possibly your business, what is it that they would be looking for in you and in your business?
- Sound Business Plan – A sound business plan is the first thing that any business angel would be actively looking out for, in every suitor that comes forth for obtaining funding. Without a proper business plan that clearly charts out things like the business idea, growth projections, market scenario, competitive analysis, medium and long term revenue forecasts, and so on, most business angels are unlikely to even pay heed to the request for funding. Therefore, it is imperative that not only the detailed plan itself but also a suitable summary of it is prepared for the attention of prospective business angels. Being hard pressed for time, the summary business plan would determine if the business angel would actually be willing to listen to the entire, detailed version of it. Also, a lot of prospective investees focus way too much on the business idea itself, often overlooking its viability as well as the propensity to generate profits/income. Therefore, it is important to harp upon the profitable aspects of the business idea rather than just the idea itself, as it is the former that business angels are really looking to hear.
- Sufficient medium to long term returns – This is something that all business angels would be looking for, viz. returns on their investment to the tune of 20-30% once the business has crossed its first couple of formative years. In case of a flourishing existing business, where the funding was made for things like capacity expansion, expectations of return on investment would pretty much be there from the first or definitely the second year from making the investment.
- Business angels also expect a sound rapport with their investees, i.e. they expect to invest in a business whose proprietors would be very comfortable to deal with. The investor would expect himself as well as the business owners to mutually adjust and accommodate with one another, keeping the common goal of the welfare of the business in mind.
- Tax breaks – Often overlooked by others (but not by the investors themselves!), business angels do stand to gain substantially in terms of tax relief on the investments made by them. For instance, in case the business qualifies under the Enterprise Investment Scheme (EIS) regime, then the investors could claim income tax relief and obtain relief from capital gains tax (CGT) on the sale of their shares in the future. There could also be other prospective legacy tax advantages.
- A suitable exit strategy – Even if the business and the relationship between the business angel investor and the business owner is just starting out, it may not be a bad idea at all to discuss the exit strategy with the investor and be clear about it, as the investor would in fact surely be expecting this. Most business angel funding is rarely for eternity; rather, business angel investors have a set time frame in mind for which they would like to be in the business, and exit when opportunity is rife – after they have achieved their objective of a certain rate of return that they had in mind.
- A possible demand and expectation of the business angel investor for the first right of refusal in participation for the next round of funding is an extension of the exit strategy point mentioned above. This is a clause that comes handy from the business angel’s point of view in case the business does not turn out to be a viable investment eventually, or the business is not run the way it had been envisioned by the investor. With this clause, if the experience has not been to the satisfaction of the investor, he would really be keen to either exit the investment or till that does not seem feasible as the returns are yet to come in, could at least refuse any further funding.
- Board position as well as mandatory consultation and approval on all major business decisions can be the additional expectations of business angel investors. While this may seem to interfere with the management style of the business owners, it does help when the investor is known to have sufficient knowledge and prowess of the business area of the investee. Therefore, even if it seems an unnecessary burden of having to get a sort of an approval from the investor each time, investors might want to remind themselves that it is the investor’s money which is being used here, which is why the decisions being taken are likely to be in everyone’s interest. Another way in which this arrangement could benefit investees is when a probable wrong business decision is being taken, and thanks to the investor’s intervention, that decision is thwarted.