What makes a successful Business Angel Investment?

56% of ventures invested in by angel investors will fail, according to recent research by Nesta..

However, as Nesta warns, the figure could be even higher as their statistical sample was taken from angel investors who have remained active over a number of years.

Therefore, the rate of failure could be as high as 80% , or to put it another way, 80p is lost of every £1 invested.

This rate of failure is too high and the networks and businesses that depend on angel investing are beginning to recognise that it needs to be addressed.

So, how do you, an angel investor, increase your chance of success?

Simple, every investment needs three critical factors to be in place. And if any one of those elements is missing, the investment and underlying business is most likely to fail.

These factors are

  1. a great business idea
  2. a great management team
  3. a great mentor(s)

If any one one of these elements is missing or weak then the business is unlikely to succeed. Instead, the investor would be better off encouraging the start-up entrepreneur or management team to seek to improve their idea, management team or mentors before parting with cash.

As Doug Richard says of his first Dragon’s Den investment; ‘I backed a great jockey (management team) but the horse (the business idea) was dreadful’.

It is easy to get seduced by an energetic entrepreneur who believes in their idea. And you may be correct to assume that this entrepreneur will make a success. However, you have no guarantees that the entrepreneur will succeed with THIS idea.

Hence, whilst conventional wisdom says ‘I’d rather back a great management team than a great business’ investors would be wise to ensure BOTH are in place!

Why? The failure rate of start-up business – that go down with your money – is somewhere between 56% and perhaps 80%. So why risk it?

In fact, the successful angel investor needs to remain cool and clam and slowly (over a period of weeks) decide if this proposal is the right one – that this proposal has the right business idea, the right management team and the right mentors to see it to success.

So, how do you remind yourself to stay cool? Keep this idea in mind

80% or so of business that GET funding fail! That means, only 1 in 5 of funded businesses make it!

So, find 4 businesses that get funding that you would NOT invest in, before you look for the 5th that you do back.

If you can explain why others have invested in the four likely failure, why you have not and how your investment is different, then you have a much high chance of success.

If you can’t explain this distinction, then keep looking but hold onto your cash.

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  • Another area which is really important for business angels is to understand the business environment. In the UK, there is considerable regulation and high penalties if regulations and laws are breached (sometimes the Business Angel could be rendered liable depending upon his input into the business). As a Business Angel you are wise to understand these constraints to ensure that a company you are about to (or already have) invested in runs successfully.
  • Pingback: Art for Baby Boomers: Business and Pastime | Joint Specialist()

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