Q&A: Attracting business angel finance

The time comes when many small-business owners realise their only prospect for expansion is external investment. If you are prepared to give up shares in your business for a lump sum (usually between £25,000 and £250,000), you could consider approaching a business angel. These are private informal investors, usually with a successful entrepreneurial track record, who will also want some say in how your business is run. However, only two per cent of small firms seeking private equity investment are successful, so what can you do to improve your chances?

Oliver Woolley (OW) is executive director of the British Business Angels Association and partner in London-based corporate finance advisor Envestors.

How should a small firm approach a business angel?

OW: "Once you have decided on one, send an email outlining your business proposition. Include your company location, sector, how much you're looking to raise, what stage your business is at and what the proposed deal is.

"Business angel networks receive hundreds of business plans per month, so they haven't got the time to chat about ideas. Be clear and succinct about your proposition. If they like your idea, they'll ask to see your business plan."

What do investors look for?

OW: "Like any selling document, you need to engage the reader by making it exciting, colourful and interesting. You also need to show why yours is a much better proposition than the hundreds of others they wade through.

"It should contain a one- to three-page 'knock your socks off' executive summary. Include details of your management team - you need to get across their strengths, as well as skills gaps."

What else can small firms do to appeal to business angels?

OW: "Plans and ideas don't get funding - people do. The investor will be looking for business acumen and commercial awareness. They want to see how capable you are of executing the business plan.

"Investors often say they prefer to invest in a great management team with an average idea, than an average management team with a great idea. They look for vision, passion, determination and experience."

Do small firms need to have some of their own capital?

OW: "It's less of an issue for established businesses. If a business has been going for a couple of years, it has a lot more to lose. Whereas, if a start-up entrepreneur doesn't put any money in and things go wrong, they haven't lost much apart from their time. However, it's a bonus if the company is prepared to put in some finance to demonstrate their confidence."

Do small firms need to demonstrate an exit plan for investors?

OW: "A credible and realistic exit route is essential. Some people say 'investors walk into a room backwards', because they need to know how they're going to get out. Too many investors have funds tied up in small firms and are unable to realise their gain."

What is the most common reason investors reject proposals?

OW: "Entrepreneurs don't think enough about their proposition from the investors' perspective. Investors lose money on 40 per cent of deals, so it's essential to make it clear how they're going to get their return."