What makes a Business Angel? There’s nothing to stop anyone being lending money to or buying shares in an unquoted, private company. While Family, Friends, and Fools bring money, Business Angels are supposed to bring a lot more to the deal. How can the Entrepreneur tell if the Business Angel is going to bring more value than just cash? What traits and motivations should be a red flag?
- Too much time. An investor who has just left a full time job, perhaps entered early retirement, may be looking for something to “soak up” his time and be “interesting”. The exit doesn’t matter, it’s the journey that is interesting. Trouble is, they may also soak up the management team’s time without adding sufficient value to the company to speed it’s exit.
- Too little money. An potential business angel may like your deal so much they are prepared to put their own house on the line… suddenly they are motivated to make sure the exit happens really fast… and have no back-up plan. That might not be in the best interest of the company nor entrepreneur.
- Want the “badge”. Some investors have just received a big bonus or have a large amount of cash. They like the idea of being “a Business Angel” when they are talking at dinner parties. Easy, just dump some cash in a company and stand back! No added value for the Entrepreneur and an uncertain result when things go wrong.
- Risk takers. A risk taker may simple “take a punt” on your company. So they do little due diligence and don’t get to know what you’re doing. On receiving the money you feel your idea has been validated by an “expert” and proceed headlong into a brick wall…
- Corporate dudes. Consider the Finance Director who has just left a company with a turnover of £100 million. He thinks he can scale down to a company with a £100 turnover. Is he comfortable with a company with no board, no “social responsibility policy”, no income, etc. Unlikely!
These traits indicate that it is very important for the Entrepreneur’s and Business Angel’s interests and requirements to be aligned.
From an Entrepreneur’s point of view, they should ask why the Business Angel wants to invest in their business. Why not something else? When are they expecting to get out? How much time and resources are they looking to invest along with the money?
And the Business Angel? Investment targets should be written down and referred to during the deal due diligence and checked before the final paperwork is signed. Has there been a variation? If so, why and is it acceptable?