In general, angels apply less restricted investment criteria and may have lower growth and IRR expectations than Venture Capital funds. The key
factors which business angels take into account when assessing an investment opportunity are:
- the expertise and track record of the entrepreneur and the management team
- the competitive edge or unique selling point (USP) of the product or service
- the characteristics and growth potential of the market
- the up- side potential of the business angels investment
- the complementary fit between the characteristics of the management, business opportunity and the business angel s own skills and investment preferences
- the financial commitment of the entrepreneur.
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Other Characteristics Of Angel Financing
- Some business angels may be prepared to accept lower anticipated returns than a venture capital firm if there is also an opportunity for non-financial returns, like the opportunity to play an active role in the
entrepreneurial process and the fun of making informal investments.
- As minority shareholders, they are not looking to get involved in the day-to-day management control of the business.
- Business angels are likely to make more rapid investment decisions than a venture capital firm, particularly if they are considering investments in industry sectors of which they have experience, and so will spend less time
and money on a formal due diligence process.
- In order to protect their investment, angels often ask the business to agree to not take certain actions without the angel investor's approval. These include selling all, or substantially all, of the company's assets,
issuing additional stock to existing management, selling stock below prices paid by the investors or creating classes of stock with liquidation preferences or other rights senior to the angel's class of security. Angels
also ask for price protection, that is anti-dilution provisions that will result in their receiving more stock should the business issue stock at a lower price than that paid by the angel.
- Most are prepared to keep their investments for at least three to five years and very often longer. However, they are likely to want to establish at the outset how and when they can expect to realise their investment.
Likely exit routes include company share buy-back schemes, trade sale of the business or a stock market listing.
- Business angels pockets are not likely to be as deep as those of venture capital firms and so they may be unwilling or unable to provide subsequent rounds of finance. Some angels ask for the right of first refusal to
participate in the next round of financing. While this sounds eminently reasonable, some venture capitalists will want their own players only or certain investment minimums so this strategy may limit who future participants
might be.
Future representation of the board of directors also needs to be clarified. When a new round of financing occurs, do they lose their board right? Or should that be based on a percentage ownership - when their
ownership level drops below a certain level, they no longer have board representation. |
