angel investing to become financially rewarding.
The UK Business Angels Association (UKBAA) suggests on their website that “a typical business angel makes one or two investments in a three-year period”. If that is so the typical angel is not making enough investments to optimise his chances of an attractive overall return. By way of comparison, a professionally-run venture capital fund may take five years to invest its pool of capital in 20 deals. That is four a year and all VCs will tell you they screen hundreds of opportunities – though they would say that to justify their fees to investors.
The commonest complaint angels make when surveyed is that it is hard to find a broad range of opportunities – they can obviously only invest in what they see. Investing in the occasional opportunity that passes your way (which is what the “typical business angel” cited by the UKBAA appears to do) is fundamentally more risky than sifting through a steady flow of ideas looking for the gems and making ten or more investments.
So you should do everything you can to increase your deal flow.
How to find opportunities
Contacts
As with most things in business, the single best source of opportunities is your own contacts. As soon as people know you are interested in seeing deals they will start to come your way. Some of your friends probably already make angel investments and may introduce you to some of their portfolio companies.
Introductions from contacts will usually be pre-screened in some way so your time is less likely to be wasted than it would be with cold introductions.
The unsolicited deal
Once you invest in the unquoted company area, you will be targeted by mailshots. The companies behind these mailshots scour public records such as the Companies House returns of shareholders in VCTs and individual unquoted companies. As a result you can expect cold and often unwelcome mail to drop through your door.
One common type of unsolicited mail is a prospectus inviting you to invest in an unquoted company. Unfortunately, as I pointed out in the previous chapter, this legal framework often hides a poor and expensive investment opportunity.
Most unsolicited deals are best avoided.
The internet
Today a Google search is the most common starting point for many people’s enquiries about anything. If you make a search of “business angels” or something similar you will you will find many helpful leads.
Cautionary note
Before discussing internet searches further I need to offer a cautionary note. There are strict legal rules about offering financial investments to the public (I explain these under ‘FSA rules’ below). They apply to all forms of communication.
I have looked at several internet sites offering investment opportunities in unquoted companies. Many of these are not regulated by the FSA – they are obliged to clearly say so if they are – and as such they are operating illegally. This means there is a risk they could be closed down at any time.
However, a bigger concern it is that as they show a blatant disregard for the law then you might expect them to be equally cavalier with investors. So beware the unregulated deal promoter.
Crowd funding
There are a growing number of websites offering investments in private companies to individuals. Such websites are examples of the current fashion for crowd funding where an individual is invited to invest in equity or debt in amounts from as little as £100. As a result, the money sought by a company can come from many investors, which is far from ideal.
Such funding is becoming popular with companies seeking money because venture capital, debt and angels are hard to find.
All crowd funding sites need to be viewed with the greatest caution by the prospective investor. Most are not authorised by the FSA and are thus operating illegally as they promote investments to the public. All that I have looked at offer poor protections to the investor and inadequate disclosure of important information. Many people would see them as a means of gambling rather than investing. So beware.
Angels dating companies
There are several websites which operate in a similar way to personal dating sites.
The usual format is the investor registers free and the entrepreneur pays to advertise his venture. Some of these sites are interesting sources of information on the subject of investing, but they do not seem to attract the better deals.
From my own research, they are characterised by entrepreneurs looking for one or two investors for a venture that does not seek to be very scalable. And there is often an air of online Dragon’s Den about the whole thing, so I fight shy of these sites.
LinkedIn is Facebook for professionals. It had 160m members by autumn 2012. Anybody can join free and put their profile on the site and you can search through other member’s profiles in many ways. Members can then build a network and communicate with that network, but the general rule is that a new member of your network has to accept a connection to you before you can send them emails.
I know people who use LinkedIn to run or benefit their business – recruiting is a good example. If you pay for the service you get more freedom of usage. You can then advertise and reach others with whom you are not already connected.
You can also join ‘Groups’ and communicate within that group. There are three LinkedIn Groups which seem to me to be of particular relevance to angel investors, namely:
1 Angel Investor Group
2 Venture Capital Group
3 Venture Capital Café
In reality I found all three groups rather US-centric and full of naïve and unattractive sounding fundraising opportunities. However, you should try Groups such as these for yourself as you may find a better way to use this network than I have done.
Angel networks and syndicates
Increasing numbers of angels form angel groups or join angel networks or organised syndicates. This pooling of capital brings clear benefits, including:
An improved deal flow
An ability to do larger deals
The opportunity to share due diligence
The chance to invest alongside more knowledgeable investors
The combined experience of the group when it comes to helping the venture succeed
The best networks and syndicate managers do due diligence, negotiate terms, process legal documentation, and ensure that the whole of the money sought is raised.
Good networks and syndicate managers also provide strong aftercare support to their companies and report to investors.
These are compelling advantages.
There is nothing to stop you belonging to several groups to increase your deal flow.
The UKBAA lists 18 angel network members on its website (www.bbaa.org.uk) as at July 2012. It has not had the success of the BVCA in attracting almost all relevant organisations to become members and as a result its statements are inevitably less authoritative than if it represented the whole of the market.
There are many more professional angel networks or syndicates than listed by the UKBAA. These can be found by internet searching and you should not feel that membership of the UKBAA is necessarily