Why you may not need an Angel Investor for Business Capital Funding
So, you believe you are close to creating the next big thing and are on the verge of launching a potential hot-selling product but just need investment from an Angel Investor to make it a success. You believe strongly that £50k – £75k from an angel investor would increase your likelihood of success in your business venture.
But would it really?
This article explores the different ways entrepreneurs can raise money for their business and addresses:
- Whether your start-up really needs the investment.
- Whether you should invest your own funds in your start-up business and retain full control and ownership of your business.
- Whether you should take out personal loans and use credit cards to get your business off the ground instead of giving a stake of your business to an Angel Investor.
- If you are currently in employment and are looking to launch a start-up what it will take to gather enough funds.
- And finally, if you happen to be an established trading business – whether it is wise to reinvest profits back into the business and grow it organically as opposed to raising external angel business funding.
So let us review each point one by one, starting with:
Does your business actually require external investment?
Entrepreneurs tend to over-value the amount of capital that they require when meeting Angel Investors which weakens their overall negotiating position.
You say you need £75,000 for your start-up retail store to an investor but have you broken these costs down and thought about them? Do you know exactly what the rent deposit is, solicitor costs, furniture and fittings, and working capital costs exactly are?
Some recent web based investment proposals that I have reviewed on Venture Giants have stated that they have an angel funding requirement of between £75k to £100k. Very reasonable, but when I have asked some of these promising entrepreneurs to break down these investment figures, and/or reviewed these figures in their business plan I have often found huge inconsistencies or ‘rounding-up’. Spending only 30 minutes looking at an entrepreneur’s business plan, I have often demonstrated ways an entrepreneur could cut their investment funding requirement down to 30 pence on the pound!
Why do you need an office, if you are web based company? – If you need the staff, why not hire students to reply to customer enquiries? Why do you need a dedicated server if you do not have the traffic yet? Why is your rent projected at £2,000 per month – have you taken the lease out yet? Surely you could get a lower priced web developer than £30k per year? – Or yes, you would lose some time, but why not initially outsource the development? etc.
Entrepreneurs tend to over-inflate their capital requirements especially when they are at seed stage and if the actual cost of launching a product is only £25,000 then wouldn’t it be far more cost effective to look at self-funding the project or potentially raising this amount via a little networking through friends and family? If you set a target figure of £75k in your head you will quickly believe that the only way forward is through angel investment or bank funding.
You run in circles and wonder why you couldn’t raise the funding. And then one day, you will look to launch on your own and will do it for £15k. You soon realise that those expensive offices were not really that important for company’s cash generation.
On the other end, it also does happen that an entrepreneur greatly underestimates the amount of business capital that is required to effectively manage and run a new business. This can arguably be the single largest contributor to early stage business failures.
Granted this is very much sector dependent, but there are many examples of entrepreneurs underestimating the capital required to penetrate a market effectively and then capitalise their business model from that position. Think Groupon – to get to where they got (before IPO) required $1bn of investment from Venture Capitalists.
Contrast this to a recent project I reviewed on Venture Giants that stated that they were going to be the next ‘online eBay contender’ with a USP that was half way between ‘Madbid’ and ‘Ebay’ and the total funding they required was £75k.
Without delving into the investment details or financials to much here, I declined to send out the investment proposal through Venture Giants and asked that the entrepreneur come back to us after they had reconsidered the actual amount of angel investment they were seeking. As a £50k investment would not even scratch the surface of this highly saturated sector.
The barriers to entry alone are significant and proper capitalisation valuations are absolutely critical to the success of any business, especially a start up.
‘In for the penny, in for the pound’. No investor wants to get involved in a business and find out later on that they are in but now they require ten times the amount of investment than they originally forecasted.
So, as an entrepreneur searching for external funding be it venture capital or private funding, it is your duty to itemise all of the costs that you will actually require to launch and operate your business. Then decide whether you can afford to raise this amount yourself (through friends and family) or wish to raise this amount via an Angel Investor.
Which leads us onto the next point:
Why not put my own money to start-up my business and retain 100% of my business?
There is no hard and fast rule on the right or wrong way of doing things as long as the outcome is successful and you make profit. However, as an entrepreneur you will have to take responsibility for every decision you make and also shoulder the possible consequences of these decisions. Choosing the path of working in a job for example and saving your money from a salary (or any other external source) will cost you your most precious asset – ‘time and youth’.
This is not really a viable option for a real entrepreneur to even consider earning money. Paying tax, saving and later investing it into a start-up, is not feasible.
From a salaried position, being in a position to invest £50k – £100K into your own start-up business may take up 10 – 15 years of your life (depending on how old you are and what your experience level is now).
Even if you are ‘income statement affluent’, i.e. a high earner, it will still take many years to accumulate enough capital to invest in your business – firstly taxes will be higher (now up to 50% of your gross income) in combination with your living expenses.
The reason behind why I estimate it would take 10 – 15 years to accumulate this amount of money is because all of us are not that great with the ability to resist instant gratification. Leading economists have stated that the number one cause of failure in the western world is the inability to seek delayed gratification. For example, a 50% increase in salary inevitably leads to the execution of a break clause in the tenancy agreement moving up from a £400 per week flat to a £750 apartment. Oyster cards are quickly replaced with a Porsche Boxster, which eats away at any real possibility of saving funds to later invest into your own business.
Even if you are in your twenties right now and feel that a 10 – 15 year investment of your time via a salaried position is not so bad in exchange for owning 100% of your business, another trap to consider in your 10 year plan is institutionalisation.
Big companies have invested millions of pounds into research into organisational structures and work regimes to effectively institutionalise employees – so that their labour turnovers are greatly reduced, and employees ‘stick’ with them. A fine example of this is John Lewis, the department store.
As an entrepreneur I marvel at the way employees are retained by that company and the passion that is ignited within them when a bad word is passed against the business that they are technically employed by (… not really partnered with as they seem to believe they are). Many people have joined John Lewis in their twenties, worked their way up and never really left.
You may be able to keep focused on the prize, and if you believe this can happen, again this requires deep reflection on your part before even considering embarking on this path. Perhaps you are already an entrepreneur currently employed and working with the sole purpose of starting up your own company. If this is the case then it is advisable to start managing your expectations now – and start aiming to provide yourself seed capital instead of full funding of your business venture.
Seed capital or Seed money is the investment that you would use to get your business idea from your business plan to conception. So, you would use these funds to perhaps finalise your market research or your product development and then create a solid business plan designed to raise investment from an Angel Investor.
Seed capital can be £10,000 or less, and this is not an amount that you should sneer at. In fact, investing seed capital could well impress your bank manager or the angel investor that you later approach – as it demonstrates that you were passionate enough and believed in your own concept that you risked your own capital in your enterprise to get it to where it is now.
Angel Investors like to call this ‘Skin in the Game’ and it is a term used widely. It demonstrates that when the going will get tough, you will not just pack up and move on and leave the investor with a bad debt.
An example of an seed investment project would be an online web project where £10-£15k would be invested into the development of the website and to make it a commercial prospect.
The seed capital would be used to develop the website and develop the business model so that it is able to collect revenue. Perhaps even the leftover seed capital could be used to soft launch the website with a Press Release and a Google Ad word campaign to gauge the reaction of test users. This would also provide an opportunity to iron out yet more bugs in the system that may have been overlooked.
At this early stage, the business would have a much greater chance of attracting investment over just a business plan and an overzealous entrepreneur. Further, as an entrepreneur you would be in a far better position to value your company in a positive light when seeking the second round of funding from an angel investor.
It’s worth noting that Seed capital will not project your business or company to the heights of an empire (unless your business strikes in a growing industry, with the right product, at the right time) but it may well place you to be in a favourable position for real bank lending or business investor support.
Which leads us neatly to:
Why not raise investment capital that you need through loans and credit cards as opposed to raising investment from an angel investor? Many celebrities have done this including Dragon’s Den James Caan!
Unsecured debt, secured to your personal name with unlimited liability, or using a credit card to fund a start-up business is not for the faint-hearted. Credit card debt must be avoided at all expenses. They are not to be used as bridging loans and they must be avoided.
There is simply no glory in the soul crushing responsibility of paying a £10,000 credit card loan back to the bank and running and operating a business. After all of the late fees and minimum payments due to then realise that there is no way forward and nothing left of yourself, let alone your business.
Watchdog reports clearly state now that payday loans of £500 have an Interest APR equivalent to 1200% per annum! No business I know could ever generate this kind of return – apart from say this one!
In addition though these loans may seem unsecured, they are in fact automatically attached to every personal asset you have – and will ever earn – and are also attached to your personal credit rating which is more valuable than gold dust and must not be risked for anything.
Many celebrity autobiographies rave about the gutsy ways they started their business via their personal credit card which then led them to their inevitable financial success.
Good for them, but not good for you.
The bottom line is that these ‘celebrity investors’ have a huge responsibility to aspiring entrepreneurs and if they had actually succeeded via raising credit card debt this should be a fact best kept to themselves.
As an established trading business:
Why not reinvest all funds back into the expansion and growth of the business as opposed to raising external angel business capital and losing a chunk of your company?
As an entrepreneur operating an established business that may be already profitable or be well on its way to paying itself back – why not simply reinvest these profits back into the expansion of your business and retain control of 100% of the business as opposed to raising external angel investment and losing a large chunk of your business?
Before we continue with this article, please spend a minute or two studying the chart below:
As pictured above, there are stages for all businesses – and entrepreneurs tend to group an established business in one phase only:
‘Established business’ or ‘Early Stage business’
What a lot of entrepreneurs fail to understand is the key difference between seed and early stage.
Early stage businesses are usually past the break-even point – and this means that a early stage business has paid back of all of the initial costs of setting the business up and is now looking to reach a higher level or further commercialise its USP (unique selling point).
Seed capital is not only confined to ideas at the inception level! Seed capital investment proposals also include businesses that have been created, are up and running, and are generating revenue – but have yet to pay themselves back! It is a daunting fact, and most entrepreneurs will fail to recognise this, but for every £1 of investment that you place to start-up a business – that business will have to generate £10 to be able to pay you back – sector dependent of course – but £10 to £1 is based on a profitable sector.
To be classed as a real early stage investment, your established business has to be generating profits and would have had to have passed the ‘valley of death’ stage before breaking even and becoming profitable. I have seen entrepreneurs frame their first £1 – come on! If you invest £20,000, you are going to have to make back £20,000 of those £1 coins before you are classed as an early stage business and it is best if you just put that £1 back into the company account until you reach that day as you are going to need it.
This is why having an experienced business angel investor involved with an entrepreneur at the ‘valley of death’ stage of a business could be extremely beneficial. Strategic executive decisions have to be made, investments have to be made – and spending the right money at the right time can be a truly gut wrenching time for inexperienced entrepreneurs.
An angel investor’s experience at this time would allow an entrepreneur to avoid making heart-breaking mistakes at this vulnerable stage. When a business is in the ‘valley of death’, it has been estimated that an entrepreneur will encounter at least one seriously complex business problem that could lead to business failure every three months. This is where a business angel could be extremely beneficial to the venture as the angel investor would have been there and done that, knowing exactly what to do.
Having a business angel investor on your side is not a guarantee to success, but it can minimise the costs associated with the learning curve of operating a potentially profitable business.
As a final consideration to this entire article, if you happen to be an entrepreneur that has been through the ‘valley of death’ and now have an established profitable trading business, you may be reading this article thinking whether you need to raise external angel funding?
The definition of an entrepreneur is a broad term and it does cover a lot of ground.
If you are a newsagent and have now passed break-even point and you are happy with this outcome then you should not bother seeking external investment. It would be far better for you to continue doing what it is that you are doing and live of the proceeds. But though you have taken significant financial risks to get where you are, you are at best a lifestyle entrepreneur – as opposed to a real entrepreneur.
If however you are seeking to risk your own assets for your idea and develop it into the next big business, then it would be unwise to simply sit around and expect to grow your enterprise through the profits that you earn.
Better would be to target an Angel Investment Syndicate or Venture Capital group with your glowing sets of company accounts and to convince them of what you can achieve long-term.
Passing your break-even point will go a long way to establishing your credibility when meeting with an angel investor, and the investor’s guidance in long term strategic planning will be invaluable.
In the case of a newsagent now looking to expand to become the next WHSmiths (or online equivalent) a lot of changes will have to occur personally, organically, strategically, and organisationally to make this possible. An experienced angel investor will be able to get you to operate with a new mindset which is crucial for expansion and success.
The ability to adapt to each situation and stage of business development is key to an entrepreneur’s overall likelihood of success, and having an experienced angel investor onboard to lead organisation to the next level can be crucial, if an entrepreneur is to break out of their comfort zone.
If you are an entrepreneur that is seeking seed capital, in the ‘valley of death’, or are an established profitable business that is seeking expansion, then Venture Giants can assist you in finding the investor contacts that you need to take the next step forward.
We operate an online service that does all the hard work for you. All you have to do is use our easy to use investment template system to summarise your investment proposition. If you already have a business plan, editing your executive summary is all we need, and for your security we will never ask you to reveal to us your entire business plan.
We review your business proposal free of charge and if we feel that it is up to a certain standard, we approve it and send it out to our network of hundreds of vetted UK based angel investors.
We present them with detailed information on your investment proposal, and if they are interested and wish to discuss it further, they then make contact with you.
Just bear in mind that we do not approve all investment proposals that are submitted to us (we have a decline rate of 5 to 1) but we are very active with the investment proposals we do approve and feature on Venture Giants.