Raising capital from business angels and private investors isn’t as easy as some people think
There’s no question about it: Raising funding for a start-up from angel investors or venture capitalists is hard. Some entrepreneurs seem to think that investors should be falling over each other to fund their project, but the unfortunate truth is that only a small percentage of entrepreneurs are successful in raising capital for their start-up.
Unlike venture capitalists who invest other people’s money, angels invest their OWN money. It’s important to put yourself in the investors’ shoes – how easily would you be persuaded to give £100,000 of your own hard-earned money to a complete stranger? Angel investors may be willing to take on more risk than most, but it’s still a tough job to get them to write you a cheque.
Here are a few things to remember when approaching angels.
Business angels are in it to make money
You must be willing to give up some ownership or control of your business, and be able to show a significant return within 3-5 years, as well as a profitable exit strategy. Angels invest for the same reason other people do: to make money. Investing in early stage companies is high risk, so investors expect to see high returns.
Take advantage of Tax Efficient Investment Schemes
The UK Government offers amazing Tax breaks for UK Investors in Startup and Growth SME Businesses. The Seed Enterprise Investment Scheme and Enterprise Investment Schemes (SEIS and EIS) allow UK Tax payers to offset as much as 50% of their investment against income tax as well as other benefits. If you haven’t already applied for these schemes or don’t know how to, speak to your advisor and make an application to HMRC immediately. Start-ups who have advance assurance are far more likely to get investment from Angel and Private Investors.
Don’t stop moving your business forward
Try to develop your business as much as you possibly can: build a prototype, interview potential clients to gauge their interest, prove the concept, get some letters of intent or pre-orders and possibly even start generating some revenue. The more traction your business has, the more attractive it will be to investors.
Build a team with experience in the right areas
Angels invest primarily in people, so you need to build an experienced management team that has industry expertise and a track record of growing and exiting businesses. If your team lacks certain skills, try to plug these gaps before approaching investors. If you can’t afford to hire staff, you may want to consider giving away sweat equity to make sure you have the right team in place to first make your company investment ready and then drive the business forward.
Be realistic about valuations
Although you may think your business has the potential to earn you and your investors millions, that’s all it has: potential. Turning a good business idea into a profitable business is harder than most people think, and there are so many potential pitfalls – a new competitor, misspending your startup budget, hiring the wrong staff, the list goes on. Work with your advisor to build realistic numbers and a realistic valuation with clear assumptions that can be defended.
Take investors’ criticism on board
Entrepreneurs looking to raise capital for their start-up will be rejected by most of the investors they approach. Listen when potential funders reject your ideas – their criticism is the best feedback you’ll get about how to make your business more appealing to investors and increase your chances of getting funded.
If you keep these things in mind when approaching Angel or Private Investors you will have a greater chance of getting them to the next level.
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