How can I secure funding from a business angel or venture capitalist?
Although banks still provide the bulk of start-up funding in Australia, there is a thriving angel investor and venture capital market that is suitable for certain types of companies.
Angel investors are usually wealthy individuals with experience in investing in businesses that provide them with a solid return. However, an angel could come from a range of acquaintances, such as former bosses or family friends.
An angel investor will be someone with experience in owning and running a business or with specialist knowledge in areas such as marketing, sales or accountancy.
Typically, they will take an equity stake in your business in return for a cash investment. The idea is that you will use the cash to propel your business to growth, allowing for the angel to sell his or her stake down the line for a profit.
Angel investors usually get involved in the businesses they invest in – after all, they want to protect their financial prospects. They can be used by start-ups as an invaluable source of advice and guidance, especially during the formative period of the business.
Like any other kind of investor, angels will only back your idea if they feel it is a proven winner. You will need to show that you have an insightful idea that can be backed up with good business sense and, crucially, ongoing growth.
Angel investors often complain that start-ups present funding proposals to them without any understanding of their point of view. Make sure that you place yourself in an angel’s shoes. Would you invest in your business? How can you demonstrate future growth? What contingency plans do you have in place?
There are several ‘matchmaking’ services that can link start-ups with angels, such as www.businessangels.com.au.
Venture capitalists are similar to business investors but are usually a bit more hands-off in their involvement in your business and will only invest in certain, high-growth companies.
VCs will invest ‘seed’ funding to a business and may provide subsequent rounds of new finance in order to encourage further growth. They will then exit via a stock market float or management buy out.
Most VC funds get their money from large investment institutions such as banks or superannuation funds. These funds demand high returns on their investments, so VCs will only look to back a select band of fast-growth businesses.
If you have an exceptional idea or patent, this could be for you but VCs are out of reach for most start-up businesses. As an business old saying goes, VCs “back the jockey, not the horse”.
They want people with proven track records. If you’ve raised VC money before and provided a decent return or even if you’ve ‘bootstrapped‘ a previous business to success (they will like your determination), they may cast an eye over your plan.
“It’s hard when you don’t have a track record,” says Paul Clements from business advisory firm Clements Dunne & Bell. “It’s possible, but hard. Without runs on the board, you will need a brilliant patent or invention and show a clear return. However, from my understanding there are plenty of cashed-up investors ready to invest at the moment but there’s a shortage of suitable businesses.”