iBusinessAngel

Where are your Dollars Going?

The biggest question for angel investors – and hardest to answer question – is ‘what am I actually investing in’?

However, if we ask the question another way, it does become easier.

If we take the approach that the task of the investor is first and foremost not to lose his money, then the first question that comes to mind will be this:

‘if the business plan as presented fails and the business assets are liquidated, will I get any or all of my money back’?

The answer to this question will tell you whether or not you are investing in anything tangible or whether you are well and truely taking a punt.

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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?

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“Venture Capital funds available for start-up and growth businesses has dropped 70% since 2000″, said Anne Glover chief executive of Amadeus Capital Partners at the BBAA Annual Awards Dinner.

This means that businesses seeking new capital that are unable to raise bank finance (and who is able at present?) will need to increasingly turn to Business Angels.

In the view of Anne Glover, this represents a huge opportunity for Business Angels as the Venture Capital businesses will not be able to take all the best deals and leave the angel investors with the left-overs.

In fact, a theme that developed during the recent BBAA event was that Venture Capital firms want to work with Business Angels.

A number of VC firms, such as Catapult, look to invest alongside Business Angels.  Rob Carroll, managing director of Catapult said “investing alongside experienced entrepreneurs and angel investors increases our chance of success.”

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The BBAA (British Business Angels Association) trade body is today organising its annual awards ceremony and conference at the Belfry.

The event is sponsored by Advantage West Midlands, the redevelopment agency for the West Midlands.

It will include both an opportunity to recognise key contributions made to this growth sector during the year at the annual awards dinner as well as create a platform for discussion about how this new sector should grow during the conference session on Thursday.

Many business angel networks and agencies have seen an increase in activity in 2009 as a result of high net worths looking for greater influence over how their money is invested as well as more business start-ups turning to business angels to provide initial funding.

However, converting interest into actual funds invested; and, funds invested into business success is where the industry still needs to prove its mettle.

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Should a Business Angel look to invest in a LLP (Limited Liability Partnership) or a Limited Company?

Often, entrepreneurs will have both LLPs and LTDs for their different businesses.

To answer the question of which is better we need to ask:

Will the business use the profits (in the main) to reinvest? Say, build a franchise business? If so, keep the profits inside the business and re-use them before paying out and paying tax – so use an LTD company.

Or will the business pay out all (or nearly all) profits as ‘earnings’ then choose LLP – as you can offset the cost of cars (which you can’t for an ltd).

So, the answer depends on the business goal. And the tax and legal issue is simply which structure helps you achieve your goal best?

Given that many Business Angels are looking for a sale of the business, and entrepreneurs are not forecasting immediate profits, the entrepreneur will set up a Limited Company, as this allows the reinvestment of any earnings. 

Equally, the standard company law that surrounds the treatment of shareholders and directors is more clearly established for LTDs than shares of Limited Liability Partnerships.  Hence, for larger investments, investors would most likely prefer the cleaner structure of the LTD.

However, not all Business Angels are looking for sales in the short term, and a number of new Business Angels may be willing to accept a mixed portfolio of investments – some of which will seek a sale in the short term, and some of which will seek to pay cash to partners early on.

In the case where the business requires capital assets, it might make sense to have both! Here the ‘operating’ company can lease the assets from the ‘investment’ company. This kind of thinking applies to a manufacturing or tech company – one that buys capital assets – but not a web based or service business.

But decide the business and investment goal first – then the tax and legal structure.

Small businesses and start up ventures can no longer access easy investment from banks and therefore need to turn to private individuals – or business angels.

These business angels also often bring a degree of industry experience and knowledge that can be invaluable for small or start-up companies.

The UK has the highest number of angels in Europe, nearly 5,000 active investors in 2007. They invested €73m in 388 deals in England and Wales and a further €41m in 61 deals in Scotland. The average amount raised per deal is €327K and with many investments starting at or around €20k per stake.

The number of wealthy investors in the UK looking for an alternative to investing in stock markets and property is growing rapidly, we believe, and they are looking at the Direct Business Investment option with greater interest than ever before.

In response to a surge in interest in this sector and to serve this growing community of business angel investors we will launch www.iBusinessAngel.com in the early autumn of 2009.