6 Red Lights for Business Angels

An investment proposition you say? What could possibly be wrong with your company/idea? Any Business Angel would fall over themselves to invest? Really? Here are six things I and most Business Angels will review before exchange their cash for shares…

I (and other Business Angels) have the money and I (we) don’t need to make an investment… you need the investment and need to persuade me that you have a very low risk opportunity that will yield big returns. Once I understand the technology and why it is going to be fantastic, I’ll be looking for reasons not to invest. If only a few are found I’ll look to see if they are fixable… so what are the warning signs?

  • Lack of dedication. To be successful the start-up staff (which means more than one) will be working more than the standard 9-5 day. Even when they are at the pub with friends, they will be talking about what they are doing and trying to increase the number of people who know what they are doing. Switching off at 5pm is for the employed!
  • Underfunded. Some ideas need a sufficient quantum of money to get started – for example, there must be enough money to produce the first prototypes and some saleable products as well as cover the cash flow bottle-neck that occurs as order start to roll arrive. Failing to have enough money to pay suppliers while customers pay you can cause a fatal cash crunch.
  • Poor processes and controls. As more orders come in, processes need to be in place. For example, ability to invoice customers, to collect and accept their money, manage the resources required to fulfil the order, pay suppliers, provide support for pre-purchase and post-purchase, manage customer comments into references in case studies. Controls need to be place to prevent too much credit being given to customers who fail to pay on time. All of these processes and controls  are need to ensure the company succeeds in the future.
  • Inexperienced Staff. The senior management team of the company are key to making the whole project work. If they don’t understand strategy, are unable to weigh up advice and unable to manage their employees the company will have problems in the future.
  • Poor research. Business Angels, Investors, Bankers, Venture Capitalists all ask to see the business plan so that they can establish how well the management team understand the market and what is required to be a success. How can a Management Team that hasn’t even used Google, Bing or Yahoo to check and understand the competition and their market profile create a world beating product?
  • Too many “Black Swans”. The presence or absence of “Black Swans” can be debated. What is obvious is those teams that have done all of the above will experience less (or no) unexpected, catastrophic events simply because they are more aware of the world that they are working in. And if a key supplier does go under or a new competitor arrives on the scene you can be sure that a successful company will have a strategy in place to counter the new threat.

Before the offer letter is written I’ll have looked for all these signs…if you’re looking for investment and get rejected, perhaps this list is where you need to start looking for an explanation.

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