Don’t jump into bed with the first investor who buys you a drink
Posted on: 13/10/2014
“50% of all new businesses fail in their first 2 years.”- Former Dragon Theo Paphitis.
Working out the right investment option for your new business is tricky. Be selective. Too many start-up owners jump into bed with the first investor who makes them an offer. Don’t do this, but if you do, use protection. It’s nearly impossible to value a start-up business so be careful about giving away too much too soon! Pre-revenue start-ups are typically valued up to £200,000, although this varies dramatically and can be much lower or higher.
Each day this week we will blog about a different investment option for start-up businesses.
Angel investors are high net-worth individuals who typically invest between £20k and £200k in return for equity in a business. They will invest in multiple businesses and look for a 10x return on investment as they know most of their punts won’t come off. Angels are essentially gamblers and around just 30% of angel investors are profitable. Be selective!
If you accept investment from an angel, you need to know that they are looking for an exit route within 5-7 years. They look for a business to take off, become profitable and then will want a trade sale so they can cash out their money. So, if you have no intention to sell your business, angel investment may not be for you.
If you would be happy to sell up you should know who will buy you out. This is great to know from the onset and you can help give direction to your enterprise.
Angel investors are a mixed bag and you want one with direct experience in your sector. A great question to ask is, “how many deals have you got funded in my sector in the last year?” All good angels will be able and happy to answer this question.
Experienced angel investors:
- Have good contacts in their sector.
- Are very selective about who they invest in.
- Stick to what they know.
- Will be in close proximity to you.
If you can snag an experienced angel, they may even bring on board other less experience investors. They will typically remain the lead angel and will give the others direction. You may also be able to interest an investor if your business is something that is close to their heart. For instance a service relating to a charity they’re involved in.
Angel investors are usually more suited to more developed new businesses, as they’ll have a better idea on their businesses’ value and how much investment they will need.
Where to find Angel Investors?
Have a read of our piece about the best crowdfunding campaigns. We will post about crowdfunding in more detail later this week. Tomorrow’s post will be about accelerator schemes.
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Written by Martin Stocks | @Stocks1986