How business angels source investment opportunities

It's a jungle out there for business angels and start-ups without the right contacts.

Businesses are starting up everyday but many remain starved of the vital funding and help they need to grow. Business angels are supposed to help plug the gap but what methods do angel investors use to find the businesses they choose to invest in?

It isn’t especially hard to find things these days. In the 21st century pretty much everything you need to know about established businesses and the people who own them can usually be found online.

Just tap in a combination of either an individual’s name and company name or address and in seconds – unless that business is cut off from civilisation based in deep in the tropical rainforests of Borneo – you will soon find what you are looking for.

But what if that business is a start-up or seed stage business? And one that has yet to set up a website, with an owner who has little or no online coverage. For all the potential angel investor knows, that business might as well exist beneath the canopy of some remote rainforest.

The problem then for business angels – who are a fairly secretive bunch – is finding the right opportunities out there, somewhere. This is no easy task when all the usual methods of finding information simply don’t work.

One possibility is to join a business group on networking websites such as Linkedin. You’ll find a stream of pitches from people all over the world asking for financial backing. Here you have the opposite problem, some of these may turn out to offer a great opportunity, but you would need to devote a great deal of your time sorting through the online jungle to discover whether they are genuine.

The trouble is being faced with too many opportunities or too few.

You might also try backing someone you know. But if you don’t know anyone starting up a business anytime soon you would trust to make good use of your cash, the best way to find opportunities is to join a network.

Before you go ahead though it might be worth finding out how the network sources its investment opportunities. Despite all the websites and online business groups that have sprung up in recent years the method your average business angel network uses to find businesses may surprise you.

A recent report by the UK’s Department of Business Innovation and Skills found that the most common method for recruiting entrepreneurs and business propositions used by business angel networks in the UK wasn’t through the Internet, websites or even through events – the most common method by some distance remains good old-fashioned word of mouth, with referrals from banks also featuring highly.

Even more surprisingly websites and information fairs rank third and fourth and articles in the press didn’t feature at all. This tells us a lot about the way business angel investment works in the UK. Despite all the hype about speed funding events taking place around the country and a few notable successes, business angel investing is still rather informal compared to VC investing.  Often it is a case of who you know including a high proportion of friends and family and old fashioned networking.

Many entrepreneurs who don’t know a business angel are likely to miss out on potentially valuable funding and advice for their business as a result and the business angels themselves will miss out on a potentially lucrative opportunity.  Despite a number of business angel groups becoming established in the UK in recent years, the sector remains low key.

Those involved in the promotion of business angel investing need to promote themselves more widely and raise awareness of what they have to offer. There should be more transparency surrounding investment failures as well as successes so that those individuals who want to invest can navigate their way through the jungle with more confidence and advertise what they have to offer to those start-up enterprises vital to the recovery.

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