Has a Business Angel Investor ever asked you for equity in exchange for no investment?
If not, then this article may be worth reading.
As an entrepreneur you have taken the big step of deciding that you wish to go ahead with seeking investment from a business angel investor and have made all of the preparations and crafted the perfect pitch for the investor willing to listen. This article does not intend to explore the ‘art of a perfect pitch’ or ‘the art of crafting the business plan of the year’. Instead, this article intends to explore three other aspects:
- Understanding what type of entrepreneur you are: serial, lifestyle, empire builder and how to use this information to specifically target business angel investors that will understand you and your business, as opposed to simply mass mailing your business plan to any investor that is willing to listen.
- The importance of entrepreneurs to reflect on what their real motivations are towards wealth accumulation before contacting and targeting angel investment.
- How to use this information to weigh out what a business angel investor can actually bring to your company, before deciding how much equity you wish to exchange for capital – or even no capital!
Raising investment, especially angel investment is a value proposition. Angel investors are specifically seeking equity (or take on the responsibility of debt) and make a return on investment, whilst an entrepreneur is seeking to not only raise investment for his company but also to gain experience, contacts, and knowledge. Considering what role an angel investor will play in your company is essential as well as their experience level.
Learn to reflect
The second part of this equation takes into account business scalability, future growth prospects, profit forecasts, intellectual property you own (if any) and the management team that will manage the angel investment. Yes, even picking your management team matters when you are raising angel investment.
Sadly quantification of ‘knowledge and know-how’ is usually lost on most entrepreneurs, and it is important when seeking an investor to ensure that your personal and business weaknesses are strengthened with an angel investor who will consolidate these areas.
Understanding the value of experience
If for example your main aspiration is to become an ’empire builder’, then targeting business angels that are running successful businesses will be much easier to engage with, as they will share your philosophy and help you to pick the most effective strategy. This alone can be more valuable than the investment itself.
If you share business characteristics with that of a ‘serial entrepreneur’, you would benefit most for an investor running several companies simultaneously. Such an investor could provide you with expert advice on how to strategically manage business resources and coordinate your employees. Furthermore, they could bring you suppliers, customers, and employees through a strategic partnership. Moreover, your business angel could already know important players in your industry and help facilitate a lucrative ‘exit’ rather than building and maintaining your company.
The bottom line
Entrepreneurs must understand that capital investment vs equity is not the only consideration to take into account when seeking to raise capital from a business angel investor.
More specifically, valuing what an angel investor can bring to you and your company in the way of know-how, experience, mentoring, networks, and resources MUST also be quantified and added to the capital investment that the angel is willing to invest. From there, you can value the overall investment proposition as good value or not.
I am sure there will be a time in every entrepreneur’s colourful career when they are fortunate enough (or even unfortunate enough) to meet an investor believing that in light of their past successes, their contribution in experience and know-how will justify a massive stake in your company despite no capital investment. Though this will be a hard proposition for many entrepreneurs, it may be an idea to consider that owning 50% of something is always better than owning 100% of nothing – or so the angel investor will confidently say.