There is (
or was?) a very flowering type of investment called Business Angel investment.
We refer as “Business Angels” to private investors who are investing small capitals into early stage or startup companies. Usually the average equity investment is between 10,000 Euro and 500,000 Euro.
In many cases Business Angels are investing into the idea, the concept and the persons behind it.
Business Angels invest either individually or as part of a syndicate, in high potential businesses.
What makes this type of investment very interesting is the excitement factor. Business Angels are usually investing from passion, but secretly they are aiming for attractive financial returns, high growth potentials and clear exit paths. To achieve their investment aims often they are ready to take higher risks as well.
Mistake 01: The Compelling Story
In these type of investments the pitch is everything, it is a compelling story which is the most important element to attract the attention of an investor. However since it is a kind of story telling it often falls into broad or fictional categories.
Comparing the past years statistics we can see that only one out of ten investments are able to bring a ten times capital invested. Meanwhile almost sixty percent of the investments fail to return the capital.
Mistake 02: Understanding the Expectations
The risk is high, but the expectations are clear. Business Angels are usually looking for ten times of their investment capital over a three years just as the Venture Capitalists.
The most popular start-up ventures types are those which stand out from the competition and which, with their product are able to change the landscape of their industries. It is even better if their product is a patented innovation.
Mistake 03: The Focus & the Potential
However the most successful fund raisers are those that solve a truly massive human problem. Or at least they liberate people from automating tasks, freeing up valuable time. In these cases the story focuses on what the world will look like when the problem will be completely eradicated.
One of the most important thing for you as an investor is to look beyond the product and to try to discover its advantages and potentials. You can always change the surface of a product or the way how to market it. An investment is supposed to focus on the possible returns without allowing play for emotions.
When you spend time in the Principality of Monaco and you are interested in the field of investment, you can notice that every month there are various events dedicated to Business Angels. Many start-ups that are looking for additional funds, travel to Monaco to make an often eight minutes only presentation to catch the attention of the Business Angels.
They know that the Business Angels are willing to invest in early stage and these equity investments can dramatically increase the business potential of these companies.
Based on my experience many investments will require for further capital injection. The follow-up funding is usually further 50% in the upcoming years.
Mistake 04: Not sharing the initial Risk
When an idea is exciting and the concept is clean then Business Angels are willing to take the risk in the hope that the concept and a great execution will bring the desired success.
As you can see in other investment areas such as Venture Capital, in many cases Business Angels go in syndicate to reduce and diversify the initial risk. This way they also have the potential to invest into various projects securing a higher success rate on the return.
Mistake 05: Investing into the Product instead of the Person behind it
Usually a person behind the start-up company or the idea and his capability for success is considered as a main factor. Therefore one of the most important pre-investment phase is the due intelligence of the involved people. In many cases Business Angels trust more in the people involved than the idea itself.
Business experience is not requested but obviously it could bring a huge advantage to the table. When a funding project involves experienced business people, who understand their obligations towards the Business Angels, as well as they know how to commercialise their ideas, it can deliver a very positive impact during the fund raising.
To understand the difference between “LifeStyle business” and real entrepreneurship in a Business Angel investment is almost crucial. Investors are not aiming to fund someone’s lifestyle.
“Keep directors’ salaries under control. It is always better to offer them higher compensation with corporate shares related to business results, instead of exceptionally high, fix monthly salaries.”
Mistake 06: Confusing investment briefs
The whole fund raising process can be fastened up by the people involved. To develop, gain result and quality in any business sector the most important thing is to create simple and well connected business processes that Business Investors relate to in a clear way. This gives a transparent overview to all the involved parties and a much better understanding.
When people fully understand the corporate processes they are ready to come up with innovative ideas.
This is especially important since investing as a Business Angel always requires that “first instinct”. To reach this, we have to agree that any kind of improvement comes from fully understanding the specific area, and by making it as transparent and clear as possible to the people working within it.
When we can reach the full understanding on the business model or idea we can be in a very grateful situation. Despite other investments, Business Angels do not spend that much time on the legal process and they never allow the legal steps to overtake the importance of the due intelligence.