What follows is an edit of a response to a post on LinkedIn relating to the pros and cons of seeking angel investment. The full discussion can be seen here: lnkd.in/EKcb22
Angel Investment will increase your chances of an exit…
Taking angel investment and selling your business are not mutually exclusive. In fact, they go hand in hand.
From the angel’s perspective, they will want to make as high a return on their investment in as short a time as possible. So they are actually incentivised to help their portfolio companies to grow and prepare for a sale.
What Angels invest in…
I think where the confusion might lie is in how / for what purpose angels invest in a business. Without getting too technical, I’ll try to clarify this.
When angels invest in your business they DO NOT buy a portion of your company off you. This is technically known as a secondary purchase, whereby existing shares in the company are sold [NB - see definition 2 in the Investopedia link].
Instead your company issues NEW shares to the angels in return for their money (called a primary issuance).
So the angels are not investing in your company so that you can take the money out. They will invest to fund specific workstreams that will help your business to expand.
An example might be to hire an additional developer to accelerate the roll-out of a software product. Or to acquire machinery to allow you to manufacture a product.
Alternatives to Angel investments…
In some cases there may be alternatives to taking angel investment.
One option is funding the growth of a business organically (i.e. from the cash flows of the business).
That’s fine in theory, but only if you can bootstrap or self-fund your business to profitability and, once it reaches profitability, it is throwing off enough free cash to finance its growth.
But not every business can be self-financed to profitability. You might need external investment to get it off the ground.
And, even if you are up and running and profitable, expanding the business might need significant investment that the cash flows of the business could not afford.
Take a retail business, for instance. Say you sell sandwiches from a shop. You want to grow your business by opening a new shop.
How could you go about this?
You could save up all the free cash flow from your existing shop until you have enough to fund the second shop. But how long will this take?
Alternatively, you can go to an external investor and ask them for the funds, which they can invest immediately to help finance your growth.
An angel investing these funds as equity will want a share of the enlarged business. And they will expect their money to be used to fund the expansion, as opposed to being taken out of the business by you.
Angel Investment will help accelerate your growth…
It is this acceleration of growth that is key.
You need to weigh up the advantages of keeping 100% of your company and growing more slowly, versus giving equity to outside investors to accelerate your growth.
Would you rather own 100% of a £100k company, or 20% of a £10m company?
Angels are there to provide risk capital to businesses that need funds to set up or to grow, but cannot raise those funds from traditional sources.
As well as bringing money to the table, a reputable angel investor should also bring one or more other assets to the table, including but not limited to the following ABCD of angel investing:
(whether that be commercial, financial, industry-specific)
- Book of contacts
(other investors, potential partners and purchasers, etc)
(having their name associated with your business, and their money invested, should give you more credibility when looking to raise external finance, or when doing business in your industry if they are a known face in that space)
- Deep pockets [credit to Paul Grant for this one!]
(There may well be the need for an unplanned round of funding, and keeping that round ‘in the family’ so to speak can be beneficial to both the company and to existing investors)
If anything, I would expect the stats (if they exist) to reveal that having an angel on board significantly INCREASES your chances of being successful in your venture.
It is for this reason that I try to make sure that I can add value to any company I invest in as an angel, above and beyond the funds I provide.