Another plan arrives in the InBox. Take a look. Never heard of these people before but there is no cover note in the email. What are they looking for and why? I have ten minutes before I have to leave for a meeting so open the attachment and have a look. So far the entrepreneur is lucky. His proposal is being read… now to categorise the applicant… what box will they call into?
So many documents to read, review and understand. Financial models to unpick and check to see if they make sense. But so little time. Given that the plan is written by an “expert in their field” (why else would they be starting a business doing this); what are signals to a plan that’s going to be filed under B for Bin?
- No skin in the game. I look down the list of people involved in the company. How much have they put in so far? Director £40K. Ok. Non-executive Director is taking a consulting fee? He obviously doesn’t believe the company will survive! And he knows more about this that I do, so I’ll follow his lead. Filing under “B”.
- No product/service yet. There is no sample product or service. No proof that anyone will ever buy what the company is going to produce. No plan to tell the right people (i.e. potential customers) about how this product/service will improve their lifestyle. If the experts in this field don’t know why people will use the product, how will the customer? Another for the “B” pile.
- Multiple rounds of funding. Looking into the future I see that another £500K is needed next year, then £1000K the year after with profit forecast for 2015. Five years away. It’s great that the entrepreneur is being honest about the amount of money that will be required. But my share will be diluted dramatically… and that’s the best case scenario. Too hard.
- Too little money. I can see how the team has got this far. Now they want £100K and everything will work. But just the marketing will take more than that. What about the website? Cash flow? Contingency? In fact, looking at their financials I can see that they will go into the red within three months! Should I tell them? Not worth the time, they’re unlikely to listen!
- Sales and Marketing expert. The business plan assumes that a magical Marketing & Sales expert will be hired and the product will take off as sales come through the door. Just a minute, that’s me, the Business Angel. While the executive are all getting paid, I’m working for nothing. I’m marketing and selling the product. Ahh… you say “you’ll get paid when the company is sold”. True (if that happens) but then I want 80% of the company now and not 20%.
- Directors not in control. Who really is putting the business model together? An advisor? Do they understand the business? Have the directors signed up to the plan? Doesn’t look like it to me… so who is really going to run the company? To hard for me to sort out!
You may say “you’re being overly negative” and “there are no such people out there”.
I have more than one example of each… here’s just one story… part of the conversation went like this:
Brian: This is a nice house in a lovely part of Bristol. Must be worth at least £800K.
Entrepreneur: Yes. Actually more like £900K.
Brian: Do you have a mortgage?
Brian: According to your plan you’re looking for £200K which will be £2000K (a 10 times return) in five years. Why aren’t you putting your own money in?
Entrepreneur: You’re right it will be a massive success. Virtually guaranteed. My contribution is going to be sweat rather than money. I’ll be putting the long hours in to make the business work.
Brian: If you are so certain that this will be a massive success (and I’ve no reason not to believe it), why don’t borrow against the house to start up your business? To me it looks as if it’s too risky for your money.
Entrepreneur: Hmm… hadn’t thought of it that way.
So when you approach a Business Angel, make sure you don’t fall into one of these easy traps!