All the information contained hereunder can be viewed in our guide for Entrepreneurs - Raising Business Angel Investment Insights for Entrepreneurs
Raising equity from an external investor is an all-consuming exercise for you as an entrepreneur.
You have to be prepared to put in considerable effort into the process: before, during and after the actual deal is done.
‘A marriage with a planned divorce’
The equity process can be described as a marriage although a marriage with a difference, one with a planned divorce (the exit). Therefore, the level of commitment to this business relationship is high.
Investors are likely to want to join the board of directors of your company and take an active part in the development of the business. You will need to welcome this participation.
Since their investment is unsecured, an investor needs to become very comfortable with the people they are backing.
The process starts, to borrow the marriage analogy, with the ‘dating’ process. This is about the entrepreneur building a robust business relationship with the investor.
Like the real dating process, attractiveness helps build relationships whilst ‘neediness’ usually does the opposite. Ironically, when you actively ask for money from an investor, it can come across as ‘needy’.
When you go into a meeting with an investor seeking money, you will often come out with advice instead. It might be that if you go into a meeting with an investor seeking advice, you may come out with money. The former approach may be considered ‘needy’ whilst the latter is more attractive.
This means that the equity raising process is not like raising debt, e.g. a mortgage for a house purchase, which is more mechanistic.
Understanding what makes your proposition attractive and not ‘needy’ is key to securing an investment.
Tip: start the process of relationship building well ahead of when you need to raise the money
Understanding what an investor finds attractive
Like any relationship, it is essential that you understand what a particular investor finds attractive.
They all have different views so that just because one investor declines to invest in your company, it does not mean that you will be unsuccessful.
This guide will help you get inside the investor’s head and help you identify what an investor wants.
A typical angel investment process
||Deal sourcing can be proactive or reactive. Most deal sourcing comes through members, through their networks and interactions with other players in the ecosystem
||Applications are normally centralised and managed with a software package (GUST is often used). Initial screening can be informal (conducted by some members) or formal (conducted by a group or network manager)
|Companies making the initial screening will be contacted and may receive some coaching regarding the expectations of investors and how to better present the company
||Selected companies may then be invited to present to the members at an event, normally held once a month. Typically 2-4 companies present. The investors then discuss aspects of the company and potential deal in a ‘closed’ session
||Due diligence is normally done on a formal basis and includes: a competitive analysis, validation of product and IP, an assessment of the company's structure, financials and contracts, a check of compliance issues and reference checks on the team
|Investment terms and negotiations
If members remain interested, term sheets need to be prepared and the company valuation negotiated. Increasingly, angel groups and networks use standardised term sheet templates. The company may present to the members a final time
Interested members can then invest as an individual or form a syndicate to invest in the company. The final documents are drawn up and a lawyer is usually engaged in the process. There is a formal signing of documents and the agreed-upon funding is collected
After the investment, investors often monitor, mentor and assist the companies with expertise and connections. In addition, the investors often work closely with the company to facilitate an exit at the appropriate time
Source: OECD (2011a), summarised from ACA, EBAN and Tech Coast Angel materials
Investor due diligence
Investors will undertake due diligence on your company prior to deciding to invest. Due diligence is a process that verifies and confirms statements and views about a business and its prospects.
Tip: You should also undertake due diligence on the potential investor, checking out their record of support or otherwise…
This may be a challenge since angel investors do not generally have a website or publicly available information. However, this is a small Island and someone should know them…do your homework on potential investors and attract the best ones into your company.
Time to investment
You should allow a year from planning to completion of an equity investment.
Deals can and have been done much quicker than this. A typical time frame is three to six months.
However, allowing a lengthy time period will help you. You do not want to be in a position where you need funding urgently and would be on the ‘back foot’ when negotiating the terms of the investment – being ‘needy’ will put off an investor.
The relationship ends with the exit. The different types of exit are discussed in our Guide - Raising Business Angel Investment Insights for Entrepreneurs
To engage with the HBAN syndicates and network review our sample application, guidelines and submit your application for funding here.