Business Angels are often thought to be tough and worldly-wise and it’s true that they are people who have made a success of their business life, but even a Business Angel needs to remember to use their head rather than just their heart when making investment choices.
There are a number of new business angel investors entering the market, because of falling interest rates and limited opportunities for investing elsewhere, so it’s worth repeating a few essential guidelines for sound business investment:
- Invest in areas that you understand and have experience of, your knowledge & contacts will be worth more to the business and you will understand the risks better
- Be interested in the business area, get enjoyment from the activity, you’ll then be happy to put the time and effort into the business
- Do due-diligence
- check that the people you are talking to are who they say they are
- credit checks are easy now days to obtain
- check thoroughly yourself the financials of the business, or use an accountant
- examine all claims (market size, patents, etc) to ensure they are correct
- Choose entrepreneurs who are realistic, know their market/business well and with who you feel you can have an open working relationship
- Do your own investigation of the market potential, look at competitors
- Weigh up how much time you will have to spend in the business – does it fit your time available?
- It can take longer for a business to be a success (average 6 years) than to fail (less than 3 years), so plan accordingly
- Make sure that your overall aims for the business and use of the investment are in sync with the entrepreneur
- Agree the respective roles and responsibilities of yourself and the entrepreneur (would you be a working Director, or non-Exec) – agree who would do what.
Clearly there are many more issues that a Business Angel would want to cover before making the investment, including negotiating around equity/debt, agreed exit strategy and sorting out partnership / legal documentation, but by doing the basics right you’ll be in a better position to judge a sound and workable investment.