26/03/2012

By Jon Smith, author of 'Smarter Business Start-ups'

If you require larger amounts to realise your business objectives, then a route to raising the capital could be through either business angels or venture capitalists.

Business angels tend to be individuals looking to invest their money in new businesses, or businesses seeking a second round of investment to help growth. It all sounds incredibly benevolent, but angels want a better return than they would receive through a bank or through investing in stock and therefore will be encouraging you to make as much money as quickly as possible. Angels are usually found through business networks or online and often tend to invest only in businesses operating within a sphere of their expertise.

Venture capitalists (VCs) tend to be corporate organisations that invest heavily in new businesses and like angels will be looking for a high return on their investment – quickly. Both angels and VCs will most probably want a share of the company in return for cash or a share of profits and will often insist on placing a few of their own people on the board. Accepting this level of funding does come with a price – the loss of some control – but by accepting their money you can often tap into their wealth of experience about all sorts of issues. After all, both types of investors will want to make sure your business succeeds.

Business angels can be just that, heavenly angels providing the capital to make an idea work and kick start a business into an innovative, exciting and profitable enterprise. But this level of financial assistance does not come easily or cheaply. A business angel, or group of angels, is looking for a healthy and safe return on the investment that far outweighs the more obvious routes to letting money work for them – i.e. savings accounts and share dealing.

To entice a business angel something must be so striking or unique about your offering that it really makes people sit up and take note. Opening a hairdressers is unlikely to attract this kind of investment, but an innovative software product or organisation that is trying to set new precedents with technology are very high up on the list.

Venture capitalists usually have significant amounts of other people’s money to hand, over which they have free-reign (or certainly a lot of influence) to invest in businesses they feel are worth pursing. This is purely and systematically for financial gain.

During the internet boom of the late 1990s, venture capitalists seemed more active than ever, with literally billions being pumped into internet-based businesses around the world. Some of these investments paid off tenfold, but a large majority failed to achieve any return whatsoever on the capital employed. The net effect was that venture capitalists pulled the plug on internet investments and started looking elsewhere.

Choosing the route of venture capitalist investment can be both good and bad for your business. In the short-term it can actually cost you money to look for investment because a lot of the charges, such as accountancy fees, legal fees and consultant rates, are borne by your business until the deal is done, in which case it is paid back. Therefore, this route of fund-raising is simply not viable for many businesses mainly because you need to have a large amount of disposable capital to spend in the first place.