Giving away Equity in return for NO Investment
By Venture Giants
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', as the internet is already saturated with articles on this. Instead, this article intends to explore three main aspects:
1) understanding what type of entrepreneur you are: serial entrepreneur, lifestyle entrepreneur, or 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.
2) the importance of entrepreneurs' to reflect on what their real motivations are towards wealth accumulation before contacting and targeting ANY potential business angel investor and
3) 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 to invest in 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 based on his/hers experience level.
The second part of this equation for an entrepreneur must be measured and quantified by an entrepreneur much in the same way as an angel Investor would quantify and measure your business scalability, future growth prospects, your profit forecasts, how much Intellectual property you own (if any) and your management team that is managing their angel investment. Yes, picking your management team does matter 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 matched with an angel investor who possesses strengths in these areas.
For example if your main aspiration to wealth accumulation is to become an 'empire builder' then targeting business angels that are running successful businesses and have been through the process of raising money themselves will tend to be much easier and more direct to deal with and they may just understand you better and be more experienced to detect any trouble spots or red flags in your investment proposal or existing business that would give you invaluable advice on not only what these errors are but also on how to correct these errors before they can become catastrophic. This alone can be more valuable than the investment itself.
If you share business characteristics with a ‘serial entrepreneur’, you could most probably already be running several companies simultaneously and this could mean that a business angel who has experience in running several successful multiple businesses simultaneously could provide you with valuable expertise on how to strategically create a network of managing business resources and how to coordinate and organise your employees. Furthermore, he/she could bring you suppliers, customers, and employees through some form of synergy or strategic partnership. And your business angel could already know important players in your industry and understand your need and driving force of a lucrative ‘exit’ rather than building and maintaining a successful company.
In conclusion, entrepreneurs must understand that capital investment vs. equity is not the only consideration to take into account when you are 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 (especially when your business idea is only at the seed stage) and 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 that is skimming a fine line between being incredibly confident or incredibly arrogant in believing that in light of their past successes their contribution in terms of time and effort will justify them taking a massive stake in your company with no capital investment. Though this will undoubtedly be a hard proposition for many an entrepreneur to swallow at times like these 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.
Further reading: Negotiating with a business angel Investor.
Angel Investors. Venture Giants is a premier UK business Angel investment network and small to mid sized business networking portal that matches active business angel investors with entrepreneurs' seeking investment capital and business funding.
Written for and behalf of Venture Giants Enterprises Ltd. All rights reserved 2009
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