8 ways a Business Angel can spot a failure

Obviously there are quick ways to filter hundreds of propositions. Angel networks such as AngelsDen, Xenos and Beers & Partners have some techniques. But what are they? What works? And why? Or put another way, how do poor investment propositions give themselves away? In this blog, Brian Dorricott provides eight simple ways that can be used to filter that mass of applications quickly and simply.

Let’s take a look at eight ways to rule out the most unlikely investment opportunities that are likely to cross your desk:

  1. The name of principal(s) in company name. For example “Dorricott Systems” or “Smith and Puttrells”. This is a good filter because the name of the company is the first and most important bit of marketing; it should give you some idea what type of company they are and what they do.  By using the principal(s) name(s) the message being given is that the people are the most important thing – that is, they are more likely to be a consultancy rather than a company that creates an asset that is saleable in the future.
  2. Unreasonable Principal’s salaries. Yes, it’s true, I’ve spoken to two entrepreneurs who were looking for £150,000 investment with them receiving a salary of £70,000 each in the first year with the company breaking even in year three. (Worse, they proceeded to argue about who was going to be the CEO in front of me.) They couldn’t understand why I might have a problem with the payout! If the money is going in salaries, there’s none left to create the asset for future sale. Sometimes it’s a good idea to see what car the principals turn up in!
  3. Project v. Lifestyle companies. What is the dream of those running the company? Do they want to use your money to set up and then run their operation to create their own income for the next ten years? If so, how do you get your money back? If the operation is a project it means the principals see the company as taking up a finite part of their lives before they move on to the next idea. For their next idea they’ll need funds which means they are more likely to sell their company giving you a high probability for exit…
  4. The long business plan. Some entrepreneurs feel that provision of a “thick and weighty” business plan demonstrates their plan is a good one. In my experience a long plan has the following issues: (a) it is unfocused and rambles; (b) repeats points many times; (c)  misses key points; (d) is low on financials and crunchy information. All good reasons to move on.
  5. Requirement to sign an NDA. Non-disclosure agreements are onerous on both sides, create paperwork and barriers to things moving forward. (See my blog on NDAs). They can be useful in specific cases (e.g. speaking to clients, suppliers, customers, etc.) but need to be well written for these cases. In my experience, the earlier an entrepreneur requests a signature on an NDA the more likely the opportunity is to be a dud.
  6. Principals do not qualify you. If the principals have not asked about your background, what your aspirations are, why you are interested in their project, etc. by the end of the first meeting it might be a good idea to think again. If they don’t know anything about you and are not interested in knowing about you, how do they know that they will want to work with you for the next five years…
  7. “Mad scientist”. If there is a man with a great idea, who’s going to balance him with the commercial acumen? I would suggest that it is unusual for an Business Angel to be able to work with an expert for the length of time it would take to bring a proposition to fruitition. Why? Because there is a difference in expectation (new improved widget v. selling current widget), language (technology v. company development), and lifestyle (hand to mouth v. portfolio ).
  8. Need for money. Why is the money needed? If your money is simply to keep the business afloat and not expansion then what is there to say more money will be needed in the future for the same reason? If the money is for expansion and creating a new, saleable asset, that’s good news. Of course, the real reason may be dressed up, so some digging may be required…

Ok, so you didn’t commit any of these sins and still you’re getting no response? Ask the Business Angels that you speak to why they weren’t interested… perhaps the idea needs a little more work or its presentation could be improved; or perhaps the idea is not viable at this time.

This Post Has 5 Comments

  1. I have come across all three… Most often principles don’t qualify me. They don’t ask for a CV (although I always provide it) and they don’t ask for references. The next most issue I come across most often in unreasonable salaries followed by the company names.

    In one case two people asked for a combined salary of £140K for the first year while seeking £150K to fund the business. They were surprised I thought this unreasonable and said later that they didn’t expect a potential investor to ask this sort of question!

  2. That’s astounding. If I was raising finance, I don’t think I’d have the gall to ask an investor to fund any level of salary for me, let alone a £70K per year salary!

    I’m not surpised they didn’t ask about you however, it seems that much like candidates interviewing for a job, few people seem to see it as a two way process.

  3. Hello, I’m doing a paper about BA’s for my Master in Management, and I was wwondering if you have any real example of a company that was not a success altought it had help from a BA?

    It would really help,
    Thank you

    1. Yes, I do know of a company that went under despite help from a Business Angel – this happened to one I invested in.

      What happened is that the supplier of equipment to the company went under about a month after the investment money went in. It took so long to get a new supplier in place (nearly six months) that two things happened (a) all the investment money was spent and there was none left to grow the company; (b) the market had changed and the window of opportunity closed.

      Brian

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