Start It Up: Why Running Your Own Business is Easier Than You Think by Johnson Luke
Author:Johnson, Luke [Johnson, Luke]
Language: eng
Format: epub
ISBN: urn|isbn|9780141965413
Publisher: Penguin
Published: 2011-08-31T14:00:00+00:00
Summoning an angel
Angel investors are wealthy individuals who punt their own money in fledgling companies, and their contribution is routinely understated. A start-up entrepreneur is far more likely to get backing from an angel investor than from a venture capitalist, bank loan or government grant. That’s partly because angels are more nimble and risk-positive than large institutions, and partly because they tend to make smaller investments, usually earlier on in the life of the company. Their money is easier to come by, and perhaps has slightly fewer strings attached.
Angel capital has been responsible for many great investments, from the start-up of Body Shop to the founding of the Ford Motor Company and the building of the Golden Gate Bridge in San Francisco in the 1930s. Backing risky undertakings is dangerous stuff, but the availability of this type of finance is crucial since commercial banks want collateral and, as we shall see, formal venture capital usually wants to back novel businesses in potentially huge markets. Don’t ask a VC to help you open your first cafe. (If you own a profitable chain of 250 cafes and want to sell it then you might call on private equity investors, who buy and sell businesses with established cash flow, but that’s another book).
Angels are sometimes characterized as ‘amateur’ investors, in the kinder sense of the word ‘amateur’, reflecting as it does the angel’s solo status and not their competence or dedication. Likewise, VCs and private equity are often referred to as ‘professional’ investors, even if some are anything but.
The ways in which business angels invest differ markedly from the methods used by VCs and private equity. Business angels are essentially entrepreneurial-manager types, most of them having worked in small companies, with perhaps 80 per cent of them having started a small firm as an entrepreneur. By contrast, many private-equity executives are accountants, who fit the financial investor mould, and rather too many VCs are MBA types. Few of the professionals offer genuine hands-on help to small firms, whereas business angels frequently look for investments where they can add value in an active way.
Business angels focus less upon the financial rewards than the professionals. They expect lower rates of return and do much less stringent due diligence – an area where angels admit they are weak. Angels are much easier-going about getting involved with other investors, too. They tend not to charge fees when they invest, and are more likely to inject pure cash rather than saddle a company with complicated debt-style instruments, where investors might have borrowed money to buy your business. In such cases, it’ll be down to your cash flow to pay off your investor’s loan – or have the banks assume technical ownership and control of your business. It happens more often than one might think.
Angels make decisions much more quickly than VC firms, and are less concerned with a pre-planned exit than venture capitalists. Interestingly, business angels have backed far fewer high technology start-ups as a proportion of their overall early-stage deals than VC firms.
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