by Patrick Hull
There is no doubt about it - the credit market is tight. The burdensome financial regulations as a result of the ‘”Great Recession”’ have made it virtually impossible to get a decent loan for small businesses trying to expand. Entrepreneurs can’t give up hope though.
As a serial entrepreneur, I know that it can be tough. However, there are other ways to secure the funding that you need to grow. One option is angel investing, which can be a positive relationship for small or startup companies looking to go to the next level. I have invested in numerous companies across Virginia and the world, and I understand how beneficial these arrangements can be. It is important that companies realize, though, exactly what is expected of them.
The first thing to realize is that angel investors expect you to be well prepared before approaching them. We have absolutely no interest in giving away our money to individuals or companies that are not going to provide a return on investment. I personally expect five to 10 times the return on every investment that I make. That is why those companies need to remember three things before approaching an angel investor: are your finances in order, do you have a good management team, and do you have a detailed business plan? These are crucial elements that you as a small business owner must bring to the table.
When I examine a business I first look at its finances. You must have a good accounting system and keep extensive records of each of your transactions. Poor, or “creative,” accounting sends up a red flag that you can’t trust the person that is pitching you. I also look very closely at the management team to ensure that they have the experience or a track record of success in the target industry. They also have to be well rounded. Make sure that you have a team that encompasses all of the fundamental necessities in business such as accounting, marketing and sales. Please don’t confuse a management team with salaried workers. Sometimes a management team can be an advisory board to the actual business. Those relationships are just as valuable as paid employees.
The most important thing that I look at before meeting with any investee is that person’s business plan. Do they know who their customers are? You would not believe the number of times that I have run into small business owners who have absolutely no idea who their customers are. That is crucial knowledge and something that a business plan will help to establish. The business plan also must contain specifics about how to reach potential customers and how much that will cost. Also outline what the cash requirements will be during the next year to five years. Having a detailed business plan illustrates that you are a serious about your business and are committed to conducting the necessary due diligence to see if it will work.
The second part of the angel investing process is all about the relationship. Unlike private equity firms and most venture capital firms, angel investing is a much more intimate relationship. Personalities matter a lot. As a possible investee, it is your responsibility to find out if the angel investor that you are approaching will be the right fit. Do they have experience in your industry? More importantly, do they have a personality that you think that you can get along with? On the other side of the table, I have to ask myself the same questions. If there is no personality match, then it is harder to get along down the road.
This relationship theme is crucial because angel investors are not just investing in a company – they are investing in the people behind the company. Before approaching any investor, take that concept to heart. Come up with a strategy that will allow you to consistently keep your investors up to date on the progress (or lack thereof) that you are making. Also, speak to how you plan to leverage your investor’s knowledge capital to help you grow your business. This is something that everyone in my position expects. Being proactive will greatly increase your chances to receive the funding you need and grow your business.
The third and final part of the process is due diligence. Angel investors are willing to take risks, but they want to mitigate the possibility of losing money as much as possible. It is your responsibility to bring as much information and as many ideas to the table as possible. It is our responsibility to review that information to the best of our ability. We have to ask the tough questions to find out what risks are involved. We also have to look at liquidity strategies if things don’t turn out well. You can’t be discouraged by those questions, but you do have to prepare for them. The more answers you can provide the more comfortable we will be in partnering with you.
Angel investing might not be for every company. If you have the option of growing your company on your own and you have the successful relationships to make it happen then you should. For those companies looking for a little extra capital to take things to the next stage, angel investing is a beneficial way to move forward. Just remember that you need to think long and hard about what you are asking for and if this type of relationship is right. I have been fortunate to have been on both sides of the table for over three decades here in Virginia and have found it to be enormously rewarding. Chances are you will, too.
Patrick Hull is a serial entrepreneur with more than 25 years of experience launching successful companies. He is the founder of GetLoaded.com, a freight matching service for long-haul truckers. As a business owner and investor, he controls financial interests in more than 30 companies, which span a variety of industries .He is currently the CEO of Phull Holdings based in Chesterfield County and can be contacted at .Tweet
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