This should be an exciting time, you’ve waded through all those investment proposals and found a business that feels right, one that you believe has the potential to give you a profitable exit in 3 years.
So what next? Will you be a ‘guardian angel’ or a hands- off angel investor?
Experienced business angels will have learned the pitfalls and the risks of getting involved with fledgling business investment, but novice business angels will often need to learn the hard way as that fledgling business grows and develops.
Entrepreneurs who set up these businesses are a varied bunch exhibiting many different characteristics, but what all those who are successful have in common is a passion for what they do and a strong work ethic. Presumably, having chosen a business to invest in, this will have been identified from the start.
But things can and do change with time. They say you don’t know a person until you live with them and the same applies when you do business with someone, particularly when the commitment is three years or more when it comes to angel investing.
So going back to the introductory point, it is much better to be a hands-on ‘guardian’ business angel so that you have some influence on business growth rather than simply handing over the cash and leaving it to the management team. The existence of a good management team will have been one of the most important considerations from the start. You will already have formed an opinion as to how good they are if you have done your homework prior to investing.
But there are no guarantees, businesses do go through growing pains. Anyone who has started a business will know about the hard work, the sleepless nights, the multi-tasking and keeping costs down to a minimum. If it is a small team then stress levels will be at their highest at this stage and focus can sometimes be lost, particularly if the team or entrepreneur is distracted by other business interests. Again this is something that would need to be considered before investing.
With the odds stacked up against success it is vital that the team keeps its eye on the ball in these early stages. This is where the encouragement and guidance of a business angel who has been there and done it will come in especially handy.
A business needs to be carefully nurtured from the start to survive its early growing pains. Does the business have accounting software? If it doesn’t then the book keeping process will eat into time better spent in other areas such as development. While in its early stages this can be manageable but the business will need room to grow as you never know when a grow spurt will occur.
After the first year or so the set up phase will be largely complete and the business will begin to mature and as it matures it will hopefully have identified a need and be carving niche for itself. But here too there are dangers for business angel investors to be aware of.
Imitation is part of human nature, from birth we begin to imitate those around us and the same can be said about businesses. In those early stages certain approaches will be copied and refined as the business puts its own stamp on what a competitor has successfully been doing for some time. The problem with imitation is it stifles innovation.
Some companies will get so hung up with what their competitor is doing, they will take the eye off what they themselves are doing to make their product(s) more appealing to their consumer. In a crowded market place getting this right is no mean task.
Hopefully the business angel will have identified early the USPs of the business he or she chooses to invest in and identified a clear path to business growth. This is where knowledge of a particular market sector comes in very handy because it will be crucial to provide guidance to a fledgling business at this stage.
It is no coincidence that business angels who take an active role in the development of a business are statistically more likely to achieve a successful exit. The same can also be said of those business angels who offer valuable knowledge in the sector they choose to invest in.
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