Guide to raising angel investment
What is Angel funding?
Equity or Angel funding is a lump sum of money paid for a share of the entrepreneur’s business, but thereafter it is far from simple. Unlike debt funding, the Angel shares the risks with the Entrepreneur. Business Angels take the highest risk of any other investor and fund their investment out of their own pocket, not via other stakeholders. They invest at a very early stage of the business development and, as a result of this level of risk, usually take a higher share percentage.
By investing in the business the Angel is helping to make the business succeed but they are also gambling on the ability of the management to generate rapid growth. A Business Angel is likely to be a successful entrepreneur in his or her own right, able to add value to his or her investment with experience and knowledge. Angels rarely invest altruistically and seek to get a good return on their investment on a planned exit. Statistics verify that the number one cause behind successful early stage companies is the value added from Business Angels.
The Angel will want to realise his or her investment, typically, in 3-5 years, which is usually achieved by a trade sale, Management Buy Out (MBO), re-financing or, very rarely, an Initial Public Offering (IPO). A small but increasing number of Angels are grouping into networks or investment clubs to share research and pool their investment capital.
Angels are particularly interested in the capabilities of the management team and their realism with regard to valuation. Complete start ups are much less valuable than an existing business generating revenues with an experienced management team.
What type of funding do I need?
An Entrepreneur should carefully consider the type of finance that is most appropriate to his or her business, and the amount. If he or she under funds the business, it will fail; and over funding can lead to repayment burdens.
The Entrepreneur should thoroughly investigate the options available – life savings, borrowing from friends and family, credit cards and loans, re-mortgage, grants, private equity/Angels, Venture Capitalists. At Central England Business Angels, we will help with this interrogation process.
If Angel funding is appropriate, they typically invest between £10,000 and £100,000 in up to 6 opportunities a year, seeking a return of 10 times their investment in 5-7 years.
Angels with Central England Business Angels certify they are high net worth individuals or sophisticated investors, and agree to keep information supplied confidential.
What Angel investors look For?
Below is the Central England Business Angels 16 point check list that will help you to decide if and when you should seek an Angel investment:
- Management team
- Is your team experienced, driven, coachable, and willing to cede some control and decision-making authority to take advice from outside investors?
- Target customer
- Do you have an identifiable market segment?
- Is there a demonstrable and significant demand for your proposed product/solution?
- Market size
- Are the projected revenues large and growing?
- Has your company high growth potential?
- Have you identified potential competitors?
- Do you understand your company’s differentiation points?
- Have you proven the concept behind your product or technology?
- Can this be confirmed with data or by objective experts?
- Have you built a comprehensive business plan to commercialise the technology?
- Protected intellectual property
- Have you protected your intellectual property?
- Sales strategy
- Do you have a plan to achieve widespread market penetration for your products and services?
- Will you create an internal, direct sales team, or will you rely on external channel partners?
- Profit potential
- Can you demonstrate how high margins and consistent cash flow growth will be achieved?
- Capital needs
- Do you require funds to finance growth activities, including product development, recruiting key staff, launching sales and marketing activity?
- Financial projections
- Have you developed reasonable financial projections – including an income statement, cash flow and balance sheet and supporting spreadsheets – based on logical, realistic assumptions?
- Exit strategy
- Do you have a clear exit strategy that will enable angel investors to generate a return of at least ten times their initial investment within five to seven years?
- Business Plan
- Have you developed a comprehensive business plan that articulates your key business strategies for how you will grow your venture?
- Considering Valuation
- Your valuation must fit within an Angel’s risk/reward expectations for the investment. Typically, they look for pre-money valuations well below £1 million, from as little as £250K. It takes unusual situations (e.g., a company with existing revenues, issued patents and demonstrated growth) to get an Angel to consider a pre-money valuation higher than £1million.
- Pre-money valuation
- The pre-money valuation, simply put, is the value you put on your company before getting the capital you seek. To compute: multiply the fully-diluted shares immediately prior to the proposed financing (e.g., 2 million fully-diluted shares) by the price/share of the proposed financing (e.g., £1/share) to yield the pre-money valuation (£2 million, in this example). If you add the proposed financing amount (e.g. £500K) to the pre-money valuation you get the post-money valuation (£2.5 million in this example).
- Pre-money valuation based on percent of company
- Some entrepreneurs are more used to thinking in terms of offering some percent (e.g., 20%) of their company for some amount (e.g. £500K) of financing. Numerically, divide the proposed financing (£500K) by the offered percentage (20%) to get the post-money valuation (£2.5 million), and subtract the money (£500K) from the post-money (£2.5 million) to get the pre-money valuation (£2 million). Note that these are just two different ways to compute the valuation; and hence, as expected, yield the identical results.
- Investment value vs. company valuation
- It is important to keep in mind that early stage investors will likely have their equity interest in your company diluted (made smaller) by later investors. For example, if angel group members invest £500,000 at a pre-money valuation of £1 million (and thus end up owning 33% of the company), and then a venture capital firm invests £5 million the following year at £5 million pre-money valuation, the original angel group investors will now own only half as much of the company, even though the company value has increased more than three-fold. As a result, because of the early stage at which they invest, you should know that angels group members generally receive 20-40% of the company’s fully diluted equity in exchange for their investment.