Entrepreneurs should work on their idea/ project, and design its business model.
Angel investing requires clear processes to simplify the understanding of the project and also to reduce the risk for both the investor and the founders of the company.
Angel investment is equity that high net worth individuals provide to new businesses in return of a stake of the company. The main advantage and differentiating features of this kind of financing is that it also brings knowledge and experience to the start-up so that the young team can be guided and grow at a higher pace.
The usual amount of investment is between 25 000€ and 500 000€, expecting to have a return in a period of around four/five years.
Angel investing is a type of financing that is growing significantly in Portugal in what regards sources of equity to “new born” Start-ups (pre-seed and seed stages).
To make sure everything is under regulations, to protect both the investor and the entrepreneur, it’s strongly recommended that an entrepreneur deals with Business Angels involved in a credible network.
The angels can be found through the entrepreneurs’ personal or professional network, or through national associations like APBA in which the projects selected have the chance to make a pitch to investors.
An angel is not only an individual who provides entrepreneurs equity, but also someone that supports the business in an intellectual approach, providing useful insights and important hints regarding the market within which the company is inserted in. In this line of thought, an angel must be someone who has experience in a similar or same industry as the project.
In order to build a solid and consistent project that Business Angels find attractive, a demanding journey is needed.
Following the entire journey to fundraising will be a big step towards getting financed.
A business plan is a written document that describes in detail how a business is going to develop and reach its goals. The business plan aims to show the investors, who are the people behind the project, the possible financial benefits of the business, the risk attached to the idea and how it fits into the investor’s criteria.
A pitch is a summary of the idea that can be delivered in a small amount of time. It usually takes about five/six minute and has the objective of calling for investors’ attention.
Due diligence is fundamental for investors to know about key aspects of the project and the investment proposal, before the actual transaction happens. The due diligence of investors will mainly focus on the areas of management, finance, legal and commercial, so entrepreneurs must predict some questions and have them prepared to answer with no hesitation.
The process of financing a project requires some legal processes that must be analysed by a lawyer in order to protect the best interest of both parties.
This entire journey aims at early stage equity finance. For that to happen, entrepreneurs need to manage the investment process and all the sources of equity that will be proposed. The investment will mainly come from individual investors, co-investment funds and equity crowd funding platforms.
For a company to grow as expected, a healthy working relationship is fundamental between Business Angel and Entrepreneur. A clear role of the Business Angel in the company must be established. Is important to know what kind of involvement the investor has on the development of the strategy, in decision-making, product testing, etc. With a clear establishment of roles in the company, conflict is avoided and more time devoted to the company’s development is created.
A part of the investment decision will be based on the returns and ability to have a successful exit from the company. Having an exit strategy will offer the investor some comfort and vision regarding the long-term personal goals.
To conduct a successful exit strategy is good to analyse what is the trend in the market at that time, adapting it to the actual business in specific.
There are five main types of exit:
Trade sale – Is the most used exit strategy. Consists of a sale of the entire issued share capital to a third party. It can take a lot of time to identify the right buyer for the company once it must be aligned with the company’s identity.
MBO – This strategy is not so usual, but sometimes is possible. It happens when the entrepreneur buys-back of the Angel’s shares.
Purchase of shares – This strategy allows a partial or total exit from part of the Angel investor. In this type of exit, VC, PE or even Corporate VC investors buy the Angel Investor’s shares.
Secondary market – In this exit strategy, Business Angels exchange their shares for financial liquidity.
IPO – In this type of strategy, the entrepreneur decides to launch the company in the public market, raising the levels of risk capital. This strategy enables some liquidity when new investors enter the company.