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Financial Times Business Limited
October 9, 2002
ENTREPRENEURIAL spirit in Britain is thriving but the availability of
funding for small businesses leaves a lot to be desired.
Business angels offer an alternative means of funding. Unlike traditional
sources of funding, such as banks, business angels are geared towards risk
and are therefore better suited to small businesses looking to develop.
Traditionally, the term business angels referred to friends and family
willing to part with cash for business start-ups. They understood that a
return on investment would be limited, if possible at all.
Business angels have now evolved into professional investors individuals who
have perhaps had their own business, made money, and are looking to invest
in a potentially profitable venture, with the hope of being able to have
some say in how a company is run.
Angels work both as individuals and syndicates. Richard Harrison, professor
of entrepreneurship and innovation for the Edinburgh Business School, said
syndicates were useful because they were more likely to have deeper pockets
thanlone investors and were therefore more able to provide a series of
funding rounds.
David Beer, chairman of business angel firm Beer & Partners, acknowledged
that syndicates were a less risky proposition because they allowed
businesses tospread the risk between a group of people.
However, he said the danger in a group was that other issues would surface
as more people came into the equation. He said: "There will inevitably be a
multitude of interests."
Prof Harrison said that, regardless of number of investors, small businesses
should ensure the angels they enlisted were able to offer skills
complementary to the company. For example, they should be able to build
contacts with other businesses, have a sound understanding of technology or
be able to build credibility with a bank, for example, to extend the
companys credit.
Alternatively, the angel should be able to act as a sounding board and
provide a hand-holding role. Prof Harrison said: "In short, investors have
to beworth more than the value of the cheque they are writing."
Sean Ewing, chairman of investment firm Asset Strategies, which recently
bought a one-third stake in IFA Bates Investment Services, said small
business owners first and foremost needed to take stock of where the
business was and where it was going.
He identified three main considerations: distribution channels already in
place, technology involved and final delivery of product sets following
investment.
For example, smaller IFAs would need to consider whether they would remain
small, look to be acquired by a larger player, or join one or more companies
of the same size to build a united administration system.
Mr Beer also said business angels should be able to consider the bigger
picture. He said it was not just about the finance or capability, but about
much-needed experience and grey hair obtained in growing a business. For
this, he said, an investor needed to understand the business and the market
and have the skills to add value to the business plan.
In addition, he said chemistry was crucial. He said: "I do not give money to
people I do not like. The same should apply for every business if you do not
like the person, you are not going to want them on your board."
Creating the right chemistry is a challenge. All too often a clash of
agendas makes it nigh impossible.
Terry Earp, business adviser for Business Link Suffolk, blamed this for his
own difficulty in identifying any benefits of business angels. Based on the
4000businesses he deals with each year, he said most considered business
angels as alast resort.
He said: "There is a perceived lack of trust. While the owner manager needs
money, the business angels are usually individuals with their own agenda,
which is often quite different from that of the owner. For example, they
want a place on the board and a cut of the business. In short, the two do
not marry at all."
Julie Meyer, chief executive of venture capital firm Ariadne Capital, agreed
business angel deals were challenging but that, with the right attitude,
both parties could benefit.
She said: "Small business guys need the money yesterday, but the partnership
between the business and investor is akin to a marriage. Both parties have
to enter into it with the same kind of long-term vision. It is a very
serious decision."
Accessibility of funding is a key issue for small businesses and business
angels are no exception. Banks, for all their faults, are found on every
high street, but alternative capital remains, to some extent, a mystery.
Mr Beer suggested this was because of the niche area in which the angels
existed. He said: "Business angels are specialist and secretive. Investors
just do not walk down the street and say: We want to invest in your
business."
John Mansfield, business adviser for Business Link Suffolk, said there were
plenty of angels but how serious they all were was another matter. Research
by the University of Southampton revealed that 50 per cent of business
angels made no investment at all.
Mr Mansfield said: "Would-be investors like the idea of potential growth and
involvement in a business, but when it comes to parting with their money, it
is a completely different story. Quite simply, they are not prepared to put
their money where their mouth is."
Currently, investors offering up to (GBP) 150,000 can qualify for breaks
undercapital gains tax rules. However, Mr Earp said the tax breaks failed to
outweighthe risks, particularly in view of the fact that investors generally
had to leave their money tied up in a business for at least three years.
As a standard rule, Mr Beer said investors would be looking for the return
on their investment to double every three years. He recommended that
investors choose five companies and invest at least (GBP) 100,000 across the
group. But hewarned: "Business angel investment is not for window cleaners
it is for the big boys."
In view of the range of issues to consider, Mr Beer could have a point. For
example, investors need to understand the importance of exit routes Ms Myers
said this was "essential".
Equally important, she said, was the ability to take things at an
appropriate pace. "The most important thing is to go at a pace which is
sustainable. And, more importantly, the deal is always done in the
beginning, so if you do not establish a framework, you will be held hostage
at one point or another."
In considering these issues, Prof Harrison suggested that small businesses
sought the advice of business angel networks. Ms Myers said small businesses
could thereafter do their own groundwork.
She said: "It is all about due diligence. To find the smart money, talk to
former investors. That is where the rubber hits the road."
Mr Mansfield was less optimistic and doubted whether access to funding would
be improved in the near future. That said, he did not consider this a reason
forbusinesses to fail.
He said: "It is an imperfect market and it continues to force businesses to
fund themselves for growth. There is plenty of entrepreneurial spirit, just
not the resources to match it.
"If businesses do not get these resources, it will simply be a case of them
not achieving their full profit potential."
Clare Bettelley is a features writer for Financial Adviser
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