It's an exciting time. New company, great prospects, money invested, lawyers signed off the paperwork. Money transferred. What now? Start adding value to the company. It's fun meeting people, promoting the product/service. More customers. More income. Break even. Sell the company, lots of money for everyone. That's the picture Business Angels buy into. But is it the reality? What's the impact if you are not focusing on the exit from day zero?
Do you want to help a small company by adding your time and/or money? The relationship between an entrepreneur who is running his own company and investor is a tricky one at best. So how can you maximise the chances of success? How do you save yourself from sowing the seeds of destruction in the relationship before the cheque is cashed?
In my experience I’ve seen people do one or more of the following and the result has not been pretty!
- Don’t understand investment in small companies. Are you really a Business Angel? Do you really know what you want and why you are going to get involved? What do you know about running a small business? How well do you educate yourself in what needs to be done? Do you keep up to date?
- Invest in an unknown industry sector. If you don’t know the sector, how do you know if there really is a business opportunity to exploit? How can you judge something you know little about?
- Ignore the people. Wise investors look at three things: the team, the team and the team. Put your time and effort into understanding the people. Your money should be their enabler not their goal.
- Work on your own. By co-investing you increase the knowledge being added to the mix. Work with others who you trust and you know that they have experience of successful investment and exits. It is less lonely when things go wrong and you can learn by example. And it’s not just other investors you should think about – what about accountants, lawyers, marketing agents, social media experts, etc.
- Beat the entrepreneur down hard. You are entering a relationship with the entrepreneur and you both need to work together for a long time. If one party feels that they were unfairly treated it is likely to sour the future of the relationship.
- Ignore due diligence. Surveys show a direct relationship between time on due diligence and the ultimate success of the deal. So make sure you review all details and legal issues effectively. If you are not sure what to do, find out!
- Don’t ask about how you’re getting your money back. Know how you’re going to exit. Looking for an IPO, trade sale or dividend? Everyone needs to know this before you start so that your futures are aligned.
- Ignore your risk. Want to be a Non-executive Director? Remember that being struck off as a director will affect all your companies, not the one you failed to keep an eye on. Check what the risks are. Debt and equity? Revenue Based Finance?
- Make only one investment. Small business investment is high risk – by spreading your investment you are reducing the likelihood that you lose everything.
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