Angelic Agreement? But will it stay heavenly?

More than half of business angel investments fail, but why? How much of this can be put down to the innate vulnerability of start-up businesses?

Surely having an enthusiastic angel investor on board, eager to provide a timely injection of funding to ensure success should mean failure rates i.e. those leaving the business angel out of pocket come exit time should statistically be on the better side of half.

Yet this clearly isn’t the case. In an ideal world entrepreneurs and the angel investors are made for each other, a real match made in heaven as the title to this blog suggests. Put simply most start-ups require money and if it seems like a good idea, most angel investors on the lookout for new opportunities  are eager to supply it – and make a decent return in five years or perhaps less. Perfect, the entrepreneur gets his money, establishes a viable business and the angel investor rides off into the sunset profit in hand ready to fund the next venture.

But life isn’t that simple. Good relationships are crucial to the stability and success of a business. Relationships need not necessarily be cordial at all times, debate and alternative viewpoints are healthy and can be productive , but like all relationships in life, certain elements must be in place to ensure relationships don’t unravel and become destructive.

While some angel investors will be looking more at business structures and the ideas and innovations those businesses are bringing to their market, it would be wrong to ignore the importance of the individuals who run businesses – the management team and the person(s) leading them.

The most successful investors should put fairly large sums into two or three businesses they know something about and whose management is trustworthy, at least this is what the most astute investors like Keynes and more recently Warren Buffet would tell you.

Finding out if the managers of the business you invest in are trustworthy isn’t easy. First you must establish a relationship. We often speak of relationships as having the right chemistry and it is crucial for the angel investor to feel that chemistry when he meets the entrepreneur he’s willing to invest in for the next four, five or maybe more years.

This is no easy task. Not all angel investors are entrepreneurs and many entrepreneurs don’t have the right instincts or ideas to make their business a success even with the help of investment as the statistics show. There can often be gaps in age and experience between business angel and entrepreneur. Take for example an ambitious 18-year-old fresh out of college, full of ideas and exuberance, the business angel who invests in the business may have a wealth of experience to offer, but will he/she be able to pass that knowhow, as well as money, on to ensure a successful future? There may well be gaps in age and understanding as well as experience.

If both angel investor and entrepreneur lack experience of starting up and developing a business, the relationship might turn into a voyage of discovery for both which may then flounder on rough seas. No matter how much money is invested, at least one party should know how to make the best use of it and both investor and entrepreneur must be able to work together and have their interests in alignment to achieve success and a positive return on investment.

Increasingly these days, angel investors are opting to join business angel networks and groups to spread risk rather than be faced with the possibility of choosing the wrong business to invest in. While this approach may have its advantages it will naturally create a distance between them and the entrepreneur. The cash may well pour into the business, but can the entrepreneur be trusted? This is a major question to consider, and also is the entrepreneur self-disciplined to spend the money wisely?

Investing too much money too soon can be toxic for a start-up particularly when an entrepreneur may lack focus or is prone to taking risks with your money.This brings us back to relationships, put simply, the business angel’s role is to invest not only money but also add value. For the relationship to work, therefore, the entrepreneur must be flexible, be willing to be mentored, work as part of a team and frugal with the money at his/her disposal.

Keeping these tips in mind should ensure that at least (market forces permitting) it will be the business that fails rather than the business relationship.

Business angels often find it easier to work in teams.

We have already established that angel investing is a risky business but one with potentially high rewards. So is it better to go it alone? Or seek the company of others?

It is more often the case these days that angel investing is best pursued as a  team activity. While they still exist, the lone business angel poring over opportunities to ride to the rescue of the startup seeking that vital injection of start-up capital is becoming an endangered species, more an exception than the rule, but why is this so? Why do business angels increasingly work as part of a team?

While the high risk nature of angel investing is one significant factor there are also others to consider. It is true that angel investing is not an entirely altruistic activity (despite what many angel investors might tell you). While it may be satisfying to help nurture a fledgling business to growth and profitabilty, the main aim is to make money and lots of it when it comes to exit time.

With the odds stacked against a successful outcome, by working with other investors you can spread the risk and avoid sinking your hard earned cash into one single business which may, as statistics often show, fail and leave you with a loss.

But there are always those who prefer to go it alone and try their luck, after all if you believe the business you invest in has every chance of success and it’s in an area you’re familiar with, then why not?  You are able to help shape the direction of the business and for those with an entrepreneurial background this can be a way to re-live the excitement of starting up and hopefully watching a business grow thanks to your experienced input and investment.

Going it alone as a business angel means more direct involvement and greater access to the business you invest in. Working with a team of investors or a network often means a portfolio approach where a number of businesses and investors will be working together but in a less hands-on way. Therefore, on the one hand you are able to spread risk as part of a network, but the downside is you will also be sharing any profits and spending less time on individual businesses.

The main advantage of not having a business angel network in the middle is that you won’t need to pay the usual 5% of the sum invested as a fee and granting options to the network which would eat into any future success. Networks also have the incentive to increase the sum raised – so that they earn a larger percentage.

But despite the attractions of going it alone which also includes not having to work with other investors or share profits if the business is successful, weighing the pros and cons between being part of a team and going it alone,  it becomes easy to see why the chances of successful outcomes are greater when working alongside other business angels as a member of a group or network.

And there are plenty of business angel groups out there in the UK. For the less experienced business angels, these can be excellent starting points where experience and knowledge can be shared. There are a number of established angel networks in the UK, often regional, which meet regularly to discuss strategy and share experience and they can also provide opportunities to network with other investors with varying levels of experience.

You will often hear that the great advantage of being part of a business angel network is the chance to tap into deal flows. However, you can still find them, depending on the size and effectiveness of your network or you can even gain access through online business networking sites like Linkedin, but the effort of due diligence and supporting the business is high – especially if you are alone,  therefore, although you may find the deal, it is still better to get a team involved.

Networks can provide a ready supply of angel investment opportunities numbering in the hundreds or even thousands. The process is organised and unsuitable businesses are filtered out at an early stage with the help of video presentations, saving the time and effort usually required to find the best deals out there.

The responsibility for due diligence still lies with the investors themselves but this is one area worth spending a lot of time on. You also benefit from the variety of expertise and experience offered by your fellow investors. Due diligence can be complicated, so by dividing work among its members a network can offer a more complete understanding of a business when knowledge can be pooled.

Being part of a network can only lead to better investment decisions overall and those businesses seeking investment can also benefit from having access to broader knowledge. Angel investing is not for the faint hearted but there is relative safety in numbers!