smallbusiness.co.uk: Helping your business think big

Despite the efforts of Evan Davis and his Dragons, many start-up businesses are unaware of the existence of small-scale equity investors, such as business angels. But with the credit freeze, they could provide the answer to your prayers.

Equity investment is a finance option the government has recently highlighted. In January it outlined the importance of more businesses increasing their growth potential via this route and created a national framework for investment readiness delivered by regional development agencies.

Who are the angels?

Your typical business angel tends to be an entrepreneur who has previously started at least one business and made money from it. Angels tend to work in syndicates with the investment going into a pool.

Understandably, many will have a preference for the sector of the economy close to where they made their money and name, and generally will tend to invest in businesses within two hours travelling time of their home.

These investors provide risk capital, so-called because – unlike debt finance – they have no security and are last in line for repayment if the company becomes insolvent. Typically, small-scale equity investors will look to realise their investment in three to five years.

The majority of angel investments will be under £100,000. There are thought to be between 15,000 and 40,000 angels in the UK.

Making the pitch

While Dragons’ Den has raised the profile of small-scale equity investment, it does not tell the whole story of the process involved. A presentation to a meeting of angels can last 20 to 30 minutes and there will be lots of questions following it. Like when pitching for debt finance, you will also need to produce a detailed business plan.

Business angels tend to make the final judgement on personal factors, such as whether they think they can work with the management team or not.

Think it over

Having grown a business from scratch, many SMEs worry that getting outside investment will mean losing control of the company. But some change can be good, and doesn’t necessarily mean letting go of the reins.

If the company is considered to be well run by the investor, few changes may be required, other than a seat on the board for the investor or their representative. Whatever the situation of the business, you will be required to have regular board meetings and produce detailed financial reporting.

In exchange, you will benefit from their expertise and range of contacts in terms of finance providers in the sector or their business specialism.

The major advantage is that an equity injection can result in a significantly greater total finance package because of the debt finance it can attract. Because it will strengthen your balance sheet, you will become more attractive to other lenders (such as banks).

The truth is, a lot of businesses are never likely to attract outside equity investment. Their future prospects are simply not attractive enough.

But if your business has a high growth potential over a sustained period (around five years), then you should consider small-scale equity investment as a serious option. Angel investment could give you the boost you’ve been looking for.

For more information visit the websites of: The British Business Angels Association, Business Link, regional development agencies and The Institute of Chartered Accountants in England and Wales.

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