Tips for Business Angel Investors

Top Tips for Investors

The following are tips to be aware of for any potential investment

•    The most likely outcome of any one angel investment is failure.  However studies show, overall, business angel returns are enhanced by using a portfolio approach to investing;

•    It is important at the outset for you to decide how you determine success;

•    The relationship between investor and entrepreneur is like a marriage but one with a planned divorce;

•    Start the process of relationship building well ahead of when the money is needed;

•    You should undertake due diligence on the company prior to deciding to invest;

•    Entrepreneurs can also undertake due diligence on you, checking your record of support or otherwise, so be prepared for this…;

•    You should commit to a non-executive director or advisory role but not an executive role;

•    Make sure that every contact with a company addresses the top three investment criteria in some form;

•    The best exit is a trade sale for cash…it usually maximises value for all shareholders;

•    The revenue potential of the company must demonstrate a scalable business that is capable of producing significant returns for you;

•    The best business plans have a great executive summary – the point of an executive summary is to succinctly sell the investment opportunity, not to just describe the business;

•    A compelling and fully costed business plan is essential;

•    It is important that the company's management team understand and be on top of the numbers;

•    Investors rarely want to 100% fund a business and will take comfort from other funders;

•    Founders should have ideally had made or intend to make a cash equity investment in the company, i.e. have ‘skin in the game’;

•    Have a realistic valuation expectation – entrepreneurs have to be incentivised;

•    An equity deal is not just about the headline valuation;

•    An apparently unattractively high valuation can be mitigated by a liquidation preference;

•    When considering an investment, you need to take into account any potential future funding rounds and the effect that may have on your ultimate shareholding and returns;

•    Whilst there have been many successes by individual investors, participating in an angel syndicate can have significant benefits; and

•    Syndicates need to be well managed to take advantage of the benefits and mitigate the pitfalls; the best syndicates use a charter.

Investing in private companies, whilst high risk, can be rewarding and worthwhile with positive financial and non-financial outcomes.  If it accelerates the growth of company then entrepreneurs will reap similar rewards.

This is a win-win.

If you are interested in joining HBAN, please register with HBAN here.