What Do Business Angels Look For In A Deal?

Angel investments are aimed at high-risk ventures and thus the expected return an Angel seeks is correspondingly high.

Given that a very large number of early stage deals fail and that their capital is tied up for years before the deals “exit”, most Angels are looking to make, at least, 10 times their initial money, over a 3 to 5 year term, to cover their exposure.

This makes Angel funding feel expensive, but it is usually the only option available to young early stage ventures once the Friends, Family, and Fools option has been exhausted.

Obviously, if the angel is making “10 times money,” so will the entrepreneur and thus the fact that the cost of capital is high, is mitigated by the chance to make supra-profits at the end of the day. Without this “expensive” money, they would have no company.

Normally only High Growth businesses or sectors can sustain the returns that Angels need to make. For example, software or technology companies are sought after and home knitting or one-man band cake baking would be more difficult to attract funds. Scalability, or the ability to take what you have and wring 10 times the value out of it, does not suit every business.

The management of the company is key to most Angels. You can have the best product/idea but without the right team in place, it will be difficult to fund.

Sadly, the reverse is also true, that is you can have a mediocre product but an amazing team behind you and see it fly.

At the next funding level up, the VC level, one of the major benefits the Venture Capitalists bring to the table is their database of high flyers that have already smashed down doors and seen success in previous businesses.

Interestingly, Angels in the US have differing views on success, from those of their UK cousins.

They like to see some mention of failure in the team and more importantly, they like to see how this failure has been overcome. On top of this, a group of entrepreneurs who have “not yet failed” are an accident waiting to happen and they would prefer it did not happen on their watch!

Give thought to how your team is composed, exploit your strengths, and be honest about weaknesses, for instance, “we are brilliant scientists but really need some sales experience.” An Angel may well be attracted to your circumstances (he certainly will be attracted by your honesty) and could very possibly be the sales arm that you need. If not, he will know where to source what you need.

These contact bases are probably the key discriminator between Angels and say Bank Funding, where they will have security in place should the worst happen. In other words, they are covered.

The Angel is playing with his own money and is strongly motivated to make sure that you succeed.

Human nature dictates that an Angel is going to be more attracted to a team, where he gets along with the management and you perhaps even share each other’s values. A large proportion of investment is done on the basis of “gut feel” and if one accepts that Angel investing is as much about being a lifestyle, as it is a business, wouldn’t you rather spend your day with people you liked, if you could choose?

You also need to think that you will have to see this person for the next 5 years, is this something you can stomach?

Angels are often also looking for more than a monetary return;

• They could also be looking for an entry point into a new market which interests them, or
• An outlet for exploiting their considerable contacts for mutual gain, or as is increasingly common
• Mentoring a younger Generation of Entrepreneurs, to avoid making the same mistakes that they did

A further generation of angel is emerging who is looking to give something back or do “something” for society. They could also incorporate all or some of the above reasons, but also usually have an altruistic bent, which could lead them to be more charitable on the returns they seek; but do not bet on it!

How then does the above help, when you are striving to be one of the 2% who actually gains Angel funding?

You need to have a business plan, which clearly shows an exit strategy, which delivers a minimum of ten times capital.

Moreover, let me reiterate you DO NEED a plan. Of the much vaunted three year attrition rate amongst SME’s, you can increase your chances of survival by a factor of five, by simply writing a plan, updating it and following it

Finally, you need passion for what you do, if you are not they will not invest.

Angels, as well as being able to choose who they hang out with, can smell the passion they seek. They are looking for like-minded people who will not only nurture their hard-earned cash, (Yes, they were once where you are now, but are just richer!) but people who want to make this thing work.

A lot of the investment decision comes down to emotion and feel. Once the numbers have been verified and the assumptions checked, the real work begins.

If you have got a business idea and would like to investigate the opportuny of receiving business funding then click here.