Real Ways for Small Business

Understanding Business Angels

Since Dragon’s Den began to air on BBC2 entrepreneurs, would be entrepreneurs and inventors throughout the UK have become increasingly aware that there is an alternate to business loans or venture capital.

That alternative is known to academics as the informal venture capital market and it is made up of two broad categories of investors:

• Friends and family – the friends and family of the entrepreneur, often referred to as “love money”, as primarily given to help a friend or family member usually without any due diligence or or formal screening as might be expected from a professional investor.
• Business angels – these are investors, usually wealth individuals who are not directly related or connected to the entrepreneur, i.e. they are not friends or family.

Between them, these two groups fund a large number of start-ups. The remainder being funded either from the founders personal funds or through the use of debt, usually in the form of business or personal loans.

Why Are Business Angels Important

If we assume that the majority of the love money is used to fund small, low growth business (an assumption I’ll explore in a later post) then business angels are important because they fund the “riskier” start-ups that banks are simply not prepared to lend to.

The British Business Angel Association 2009 awareness campaign suggests that there are 18,000 business angels in the UK, who between them invest twice as much money as the UK venture capital industry, investing in total £359 Million during 2008.

Clearly informal venture capital and business angel investors in particular have an important role to play in our economy. The problem is there is an awful lot of utter rubbish said about them.

Business Angel Myths

If you Google business angels you’ll soon come across all sorts of advice on how to attract angel investors, how to write a business plan to ensure they invest in your business and how negotiate with business angels in order to give away as little equity as possible.

Alternately, browse your local bookshop, or Amazon if you prefer and you’ll find dozens of books offering you their wisdom about business angels and how to get them to invest in your business.

The trouble is most of this advice is rubbish, based on myths, misconception or misunderstandings about the nature of the informal venture capital market and the nature of business angels in particular.

I had my eyes opened to the extent of these myths when Scott Shane a Professor of entrepreneurship and angel investor sent me a copy of his excellent book Fools Gold: the truth behind angel investing in America. Although he focuses on American angel investors, I strongly suspect that a lot of these myths apply equally to the angel investment market in the UK.

Understanding Business Angels

Regular readers of this blog will know that I’m currently studying part-time for an MBA. I’m now approaching the end of my studies and just have my dissertation left to do. As a result I’ve been investigating the informal venture capital market as a potential topic for my dissertation. It turns out there is a lot of interesting research that covers business angels and contradicts the commonly held beliefs that a lot of advice about business angels is based on.

So I’m starting a new category on the Business Opportunities and Ideas blog, for articles and research about Business Angels. I’ll be using it to explore the existing academic literature on business angels and the informal venture capital market as well as detailing my own research.

Questions About Business Angels

So if you’ve got any questions about business angels, how to raise finance from business angels or even how to become a business angel, please contact me and I’ll endeavour to find out the answers.

If you are a business angel, or you are an entrepreneur currently seeking funding or current funded by business angels I’d love to hear about your experiences too.

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Similar Posts:

• Angels Versus VCs
• Pitch of the Week – Business Opportunities and Ideas
• Can You Get Financing From Your Friends and Family?
• Start Up Story: Julie Cole, Mabel’s Labels Inc
• Venture capital

Tags: Business, Understanding Business