5 Things to Keep Business Angels Awake at Night

Business angels losing sleep.

“I’m not investing in that, I’m out!” If only it was that that simple. TV makes the process of selecting and getting involved in start-up business investment seem easy. The reality for business angels is somewhat murkier.

With this in mind let’s take a look at 5 things likely to keep business angels awake at night…

More money being invested in fewer start-ups…

With the billions still being poured into black holes on both sides of the Atlantic, and more recently into Ireland’s bailout, you would be forgiven for thinking there is less cash about these days. In fact this couldn’t be further from the truth and when it comes to angel investing, there is still plenty of money swishing around – except it’s going into fewer deals.

Why is this worrying?  More money is being invested in fewer start-ups naturally means that valuations are being pushed up. Does this indicate the start of a new bubble? At a recent web funding event in London, pre-revenue companies were looking at a valuation of between 2 and 6 million. We know business angel investing is risky, but valuations this high could make it hard to sleep at night.

Fuzzy business plans/models…

This may not apply to those business angels belonging to networks. It will be the unfortunate ‘gatekeeper’s job to wade through and sort the wheat from the chaff .

Those business angels who prefer to go it alone will often encounter fuzzy business plans. These are created by entrepreneurs so passionate about their business idea, they write everything down in what is often referred to in literature as a stream of consciousness ie a rambling piece of prose that makes little sense to anyone apart from the author. This worked well for James Joyce, it doesn’t work in business plans.

The entrepreneur who creates a fuzzy business plan will unwittingly ignore the basic structure of a business plan as he or she gets carried away. The executive summary will begin with a history of the creator and everything associated with an invention or an idea before eventually arriving at a point where they begin to describe what the business is about.

Patient business angels who manage to stay awake and wade through the fog of ideas may well choose to invest, but a fuzzy hard-to-read business plan with poor grammar and structure will hardly endear its creator to their weary business angel.

Super angels…

Ok so super angels aren’t too much of a problem for business angels in Europe, but in the US they have been acting, well, quite un-angel-like.

‘In the back of the restaurant in a private room was a long oval table. Sitting around the table, Godfather style, were ten or so of the highest profile angel investors in Silicon Valley’. Wrote Michael Arrington in his tech crunch blog.

Not much amiss here you might think, but think again. 10 super angels sat around one table – together? The writer goes on to suggest that these super angels were acting as a group to keep valuations down as well as fend of business angels and VCs. What else were they plotting? If you’re acive in Silicon Valley, it makes you wonder.

Friends and family funding…

The word on the business angel circuit is that working with friends and family is fraught with difficulties. In most cases friends and family know you or eachother well and if things go wrong as they often do for start-ups, this familiarity can lead to contempt in some cases. It is estimated that more than half of all entrepreneurs get help from friends and family to set up their businesses or $50 to $75 billion by friends and family in the US. Friends and family are more likely to invest in the entrepreneur than the business itself, but either way the relationship needs to be clarified, whether the business succeeds or fails.

Tax and legal issues…

Several volumes could be written on the legal pitfalls of investing in businesses. Entire guides have been written on legal, tax and regulatory issues in angel investing, some of which seem to change on an annual basis, particularly following the recent change of government.  They say tax shouldn’t be taxing , well it is for angel investors. The much heralded Enterprise Investment Scheme was brought in to mitigate the risks involved in angel investing, however it can sometimes be difficult to meet all the relevant conditions. This can lead to some unfortunate business angels losing some of their relief or even having all of it clawed back!

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