Unlike venture capitalists, whose business it is to invest in privately-held companies, business angels do not have to invest their cash. This means that they are selective about which companies they will fund. More than 90% of businesses applying for angel funding are rejected in the initial stages.
Business angels tend to invest in local companies, generally within a radius of 100 miles from their home. However, a study by Mark van Osnabrugge of the Said Business School at Oxford University, found that the more experienced an investor is in unquoted companies, the more likely they are to invest in companies further afield.
Business angels also tend to favour sector-specific investments. This is particularly true of the IT and biotech sectors.
Most importantly, business angels invest in growing companies. You may not be able to tempt a business angel unless you can show growth potential of at least 20%. As so many of the investments fail, an investor will only be tempted if there is the opportunity for a big return.
First and foremost, business angels will expect to take a percentage of the ownership of your company. This is typically a minority stake as they recognise that entrepreneurs are best left in control of their own businesses. However, this is not likely to be an insignificant amount of equity. The rule of thumb is that one third is given to each of the following:
Business angels will also want to know how they will get their money back. So be prepared to justify your business plan. They will also want to see a financial commitment from the founders.
However, while some business angels are purely interested in a financial return, others are simply hoping to protect their cash and get involved in a growing concern. Many want to take an active part in a new business in a sector that interests them.
What do business angels get out of it?
There are big tax breaks on offer to business angels, although the rules can be complex. Basically, these are the Enterprise Investment Scheme (EIS).