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Business angels

Venture capital on a smaller scale

A business angel will want to make a smaller investment than a venture capitalist and will take a more active role in your business.

If you're a controlling person who wants a business to behave exactly as you want it to, then you don't want a business angel. You might not want anyone who's going to take a significant stake in your organisation as they'll have some say in how things are done.

Not everybody feels this way, though. Judith Clegg, formerly of the senior management at Pret-a-Manger and a founding director of online website builder Moonfruit, has used business angel funding and speaks highly of it. "The best angels act as a great mentor for the management team because usually they have been very successful in business in their own right," she says. "They can be invaluable for finding and picking the right private equity partner later in the process, too."


Quote A business angel will typically want to invest less than a venture capitalist. End Quote

A business angel will typically want to invest less than a venture capitalist – say £10,000 - £250,000, and they will want to help mould your business into a success. "Angels often have a unique set of insights because they have usually run a successful entrepreneurial venture themselves," says Clegg.

"Private equity backers have a wealth of experience in backing entrepreneurial ventures but it's rare for their executives to have hands-on experience." Angels will therefore be more likely to poke their noses into your day-to-day business operations, but will do so from a position of great knowledge.

You need to be aware of a number of things when approaching an angel:

They don't want to lend you money. They want to take equity in your company. This equity, they hope, will be worth more when they come to sell it – they want the same 20 to 30 per cent that a venture capitalist will look for

You must be ready to form a personal relationship with an angel – they will want to be deeply involved in your company

You must understand your product or service and your market, and have a solid business plan. This, of course, should be a given

Like a venture capitalist, the angel will want to seehow they are going to get out of the company in the end – and they will need to understand how the value of the organisation will have increased by that stage. That requires sound financial planning and realistic projections

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Finding an angel happens in many ways. Some are informal – you might know a family member or friend who wants to be involved, or a professional adviser might be able to put you in touch with someone. Angel networking organisations also exist and are good sources of contacts. The more rigid and formalised structures in these can offer benefits in their own right. Look also in the business to Business sections of the local and national press.


It is also worth looking at the British Business Angels Association (BBAA). BBAA also has its own magazine which highlights opportunities to its network of angels.

The pitch to an angel is vital – anyone who has watched Dragon's Den will have seen several pitches fail. Here are some tips:

The angel knows nothing about your business – avoid jargon

Back up any figures with facts and knowledge

Explain why you are focused on a particular market niche

Explain how you will use any money raised - "paying myself" is not an acceptable answer

Mention any large orders and any trading track record

Bring in references where possible

Make sure the angel to whom you are talking is the right one for you – if you don't think you could work with them, that's a good reason for walking away

On this last point, note also that different angels have different areas of expertise. Just because you're dismissed by one potential backer doesn't necessarily mean you've got an unworkable idea.

Quote If they don't understand your business, you're free to abandon the deal. End Quote

You will then be down to negotiating over contracts. The thing to remember then is that you should be evaluating the angel in the same way they are evaluating you – and if you feel they're asking too much, or they don't understand your business, you're free to abandon the deal.

Remember the words of John Straw, CEO of Netrank: "In the beginning there was cash and there was equity. And cash was king whilst equity was as cheap as copper. In the middle cash was still king but equity was turning from base metal into the most precious of all..."

Or so we hope. Good luck!

What next?

Make sure you're fully prepared when you start looking for angels - we've got stacks of advice about business planning to help.

Our regular newsletters contain lots of information about finance, cashflow and finding funding. Find out more and sign up now.

If business angels aren't for you, you might want to consider looking for grants or venture capital instead.

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