How to talk to angels

A pedigree of innovation and an appetite for expensive plant means engineering-based businesses regularly need to find more funding if they are to expand.

There are really only four main options open to any growing business: secured lending such as a bank loan or overdraft; asset-backed finance (using plant or debtors as security); use of the

through one of the clearing banks, with the

as guarantor; or private equity through business angels or venture capital (VC) institutions. However, the first port of call for advice about each of these options is usually a firm of accountants.

Anyone with experience of commercial lenders will know they are a relatively cautious lot, particularly with start-ups, and they are unlikely to share your confidence that your business will succeed.

Likewise, VCs will have strict criteria about making, and managing, any investment beneath a lower limit. Consequently, the only realistic source of venture capital between £100,000 and £2m, particularly for early-stage companies, is usually business angels — private individuals who singly or in groups invest time, skills and money in unquoted companies in return for equity reflecting the risk.

In an annual survey of over 1,000 business angels conducted by investment consultant Beer & Partners, 54 per cent said they were interested in engineering, placing it sixth in a table of 20 industry sectors. Encouragingly, this position is a jump up from 10th in the 2005 table, when only 38 per cent of investors expressed enthusiasm for the sector.

The chances of raising equity will depend entirely on the commercial attraction of the proposition. So the existence and quality of the Business Plan are the crucial elements. This is the document that will 'sell' the opportunity to potential investors. 

The existing shareholders — often the management team — must be realistic and flexible in its valuation of the business in order to attract new equity. Many investors will want to have a role (which doesn't mean a job) in the businesses in which they invest. In most cases these investors can add real value through their own experience and will want to use this to follow their money.

The matching of an angel to a particular business is part of the contribution that a business angel network (BAN) can make, by knowing which of their investors suit each particular investment opportunity. There may, for example, be a skills gap in the management team which the angel can fill on a non-executive basis, or the angel may be able to introduce other parties to the business to accelerate its growth. Generally — and there are exceptions — angels are people who have been successful in business, and have contacts they can use to benefit the firms with which they become involved.

Before you start looking for a match, you should prepare your business case carefully, considering the most appropriate form of investment to take your business forward. It is important to be flexible in your approach, leave plenty of time to secure the right deal —investors will not be rushed into making decisions — and seek professional advice on the best way forward for your business. As well as speaking to accountants, you should seek advice from Business Link and one or two of the BANs who will be helpful at this stage.

Details of members of the British Business Angels Association — the BAN trade group — are available

.

Many of the BANs around the country are government-funded and focus on micro investments — normally below £50,000.

For larger sums it is best to approach one of the few private, FSA-authorised BANs, such as Beer & Partners. Our network of potential investors numbers over 1,600 wealthy private individuals and corporates and the firm sees several thousand proposals annually seeking capital in the £25,000 to £5m range.