You have a good business - it's new but it is up and running and doing well. You are at a point where you need to increase your production capabilities and your marketing budget to become a more profitable company and a force in your industry. The goal here is that you need to raise capital to accomplish both these goals. How do you find the needed capital?
You could go the more conventional route and try to get a business loan, or you can think outside the box and look towards private investors known as angel investors. Both methods have their merits, but working with an angel investor has some positive features that are not available with a business loan that will help you actually grow your business outside of the initial cash influx.
An angel investor is generally willing to assume more of a risk than a traditional lending institution. This doesn't mean that they are not risk-adverse, just that they have the knowledge to recognize what they believe is an underlying opportunity and are in a position to invest in what they believe is potential.
- The downside to the angel investor willing to assume more risk is that they will naturally want a higher payoff. This may come in the form of a higher equity stake in your company or a more aggressive rate of return on their investment. It isn’t unusual for an angel investor to expect a rate of return that equals 10 times their original investment inside the first 5 – 7 years. This can increase the company's pressure to perform and you must be certain that you can produce the results. If you are unable to meet the terms of the agreement, the investor might push to fire you from your own company and replace you with someone they feel is a more competent leader.
Angel investors can be any accredited investor but are typically entrepreneurs or retired executives with business experience. An angel investor is not likely to invest in a business that they either do not understand fully or have not materially participated in themselves in their past. This is where the angel investor stands out from a traditional lender. They have a vested interest in your success and they have the business experience to advise you along the way to be successful. Independent studies have shown that businesses that use angel investors have a higher likelihood of success than those that do not use them.
- The flip side of this coin is that you may end up losing some control over your business. If you are the type of business owner that likes to have total control, then you will have a problem with this. Based on the evidence of a greater likelihood of success, this lack of control is probably not a bad thing in the long run, but you must be open to it and accept it.
Contacts and Credibility
Whether you are relatively new to the business world or not, aligning yourself with an angel investor can open up a world of possibilities and opportunities. Being associated with an investor who has a track record of success increases your credibility. Others become much more comfortable doing business with a company that has solid, successful backing, knowing that they aren't going to fade away anytime soon. Because your ideal investor would have been in business for a number of years, they have a very deep list of contacts such as:
- Contacts to venture capitalists
- Contacts to strategic partners
- Contacts to potential customers
- Contacts to potential employees
- Contacts with lawyers, banks, accountants, and investment bankers
- What you need to realize is, because the investor's reputation is on the line as much, if not more than yours, is that they will be more demanding of results and less open to any excuses or mistakes. You have a partner now, your job is making your business run and keeping your partner happy.
With all this being said about angel investing and the responsibilities of the business owner to the investor - the business owner has his own area of due diligence he must perform before contracting with an angel investor. "You are known by the company you keep" holds true, especially with business relationships. You also do not want to walk blindly into a relationship that doesn't suit both yours and the investor's temperaments. Some of the points you want to cover before agreeing to anything include:
- Can the investor refer you to other entrepreneurs they have worked with? Just the same way you would check a prospective employee's past, you need to check out your investor's history with others. You are marrying this person for a while and you want to do your best to ensure compatibility and success.
- How do they like to help their other companies? What you are looking for is the method, type, and frequency of any help offered. Do they volunteer help with being asked? Or are they more laid-back in their approach and wait for a request or an issue to arise? This is a personality fit assessment as well as a measure of their ability to offer assistance.
- Do they have any other investments in the business space that you occupy? This is a good way to find out what their confidence level is and if they have a good handle on what it takes to help you succeed.
- Do they have relationships with venture capitalists that can help with the next round? Every businesses goal is to grow, so you need to focus on the long-term. When your growth has outstripped your angel investor's ability to help, you want assurance that the next level of help is readily available.
- How do they think they can help your business grow? This question may answer itself during the other ones, but it is important that you feel comfortable that the investor has the knowledge and skills that will help you grow.
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