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The Investors Network, a South African based community of entrepreneurs and investors posted this interesting blog a few weeks ago, well worth a read.

Recent research in the UK suggests that Angel investors will be key to economic recovery. In the UK, as in South Africa, entrepreneurship and small business forms an important part of the national economy. Angel investors play an important role here when it comes to business finance. With banks around the globe being much more choosy when it comes to investing in businesses, entrepreneurs and small firms increasingly opt for alternative finance from angel investors.

The report reads: New research published by NESTA (National Endowment for Science, Technology and the Arts) in collaboration with the BBAA (British Business Angels Association) reports for the first time that Business Angels stand to make a substantial profit from investing in start-ups, with an average Internal Rate of Return (IRR) of 22 per cent over four years, compared with 27 per cent IRR in the US.

Business Angels - investors who put personal money directly into young unquoted companies - are a significant source of early stage finance. But despite their increasing importance, little is known about their outcomes and returns in the UK.

The report reviewed 1,080 investments. More than half were directed at very early stage, pre-revenue start-ups - the riskiest time of a company's life.  This was reflected in the investment returns. Despite the fact that the majority of investments make a loss (56 per cent in this study), a substantial number (44 per cent in this study) lead to positive returns with 9 per cent generating more than 10 times the capital invested.

The report also suggests a number of strategic choices and practices that may lead to better investments outcomes such as investing in one's area of expertise, performing at least 20 hours of due diligence before investing and staying connected with the business, preferably at a board level.

Commenting on the research, NESTA's Chief Executive Jonathan Kestenbaum says "Angel investing can be a strong viable complement to traditional forms of investment which are not making anywhere close to 22 per cent returns.  As the UK grapples with finding new sources of finance to build the sectors that will drive our economic recovery, Business Angels will form a critical new asset class."

 The study finds that the EIS (Enterprise Investment Scheme) and other tax incentives contribute substantially to angel activity with 82 per cent of British angels using the EIS at least once; and the angels stating that about 24 per cent of their investments would not have been made without the tax incentives.

NESTA and the BBAA are calling for the Treasury to increase the Enterprise Investment Scheme tax relief from the current level of 20 per cent to 30 per cent for the much higher risk start ups.

Anthony Clarke, Chairman of the BBAA says " This research has proven that Business Angels are now the key source of investment in early stage high risk companies. BBAA estimates that angels are currently  investing c.£1billion p.a. in the UK  and  it is important  that  further individuals should be encouraged  to consider this asset class supported by  targeted financial incentives. Angels bring not only their own finance, but  business -building skills.  The UK needs to significantly increase the pool of business angels to invest in the successful innovators of tomorrow."

The report says that on average Business Angels in the UK invest £42,000 and each investor makes around 6 investments.  Investors typically reviewed 20 opportunities each and acquired 8 per cent of a company.  Co-investments are seen as the preference for investing in start-ups with on average 5 investors co-investing in any one round. The figures generated by this study were comparable to the performance of the US Angel market relative to the size of the Angel community.

Thank you for the contribution from, Chani Hirsch at the NESTA in the UK to this blog.

In annother interesting article from the Business Angel Blog, I found this discussion on the Angel Investment process.

Most entrepreneurs with a business idea, business plan and need for funding may not have gone through the process of acquiring angel funding before. When looking for angel funding it will certainly boost your confidence if you are already familiar with the process, the next steps and how to prepare before meeting with an investor.

Although, where can I find angel investors may be your first questions, it may be more important to first be prepared to meet with an investor even before engaging yourself in the process of finding angel investors.

The process will normally go something like this:

Once a business angel has expressed an interest, officially confirm that the angel can provide the financing.
• Even though you may not have agreed final investment terms, you do not want to waste your time with someone who has insufficient funds.
• If you are still going to need additional financing, you will need to start arranging it immediately. Negotiate key issues and, what if, scenarios.

Give the angel a copy of your business plan as a basis for discussing key points such as:
• The investment — how much the business angel invests, the form of the investment, and what the angel gets for the investment.
• Withdrawing money — what dividends, fees and salaries will be paid to each of you. Under what circumstances can these be changed?.
• Responsibilities — who makes what decisions and who will be responsible for each area of the business. How will individual performance be monitored and what will be done if performance is not satisfactory?
• Growth — what your main objectives are and how you will achieve the next stage of growth. What will happen if the business needs more capital?
• Exit — how and when the business angel will be able to realise the investment. Who will the angel be allowed to sell shares to?

Provide the business angel with any information required. The business angel will want to check financial and legal details, and confirm other points about your business and the market.
• Your accountant will be able to help prepare any financial information you need (eg annual accounts).
• For larger investments, the business angel may use professional advisers to investigate your business. Negotiate any legalities the business angel is concerned about. The business angel may ask you to provide:
• Warranties confirming that information you have provided is true. If the business later fails and it can be proved that you gave misleading information, the investor will usually have the right to claim compensation from whoever provided the warranty (typically you).
• Indemnities, where you agree to accept liability in certain circumstances. For example, if the company is sued in relation to contracts which have already been completed. If asked for either of these, get advice from your solicitor.

Agree the final investment terms.
• Your accountant and solicitor will be able to advise you on what form the investment should take and help you negotiate investment terms.
• It may be possible to structure the investment to make it more tax efficient for the investor. Make sure everything is in writing, including all the key issues. The larger the investment, the more complicated and time consuming the investment process is likely to be. For larger investments you may want to use specialist advisers who are experienced with this kind of deal.

Today, with many organisations, especially those with much at stake preferring to opt for professional business plan consulting firms for business plan help, the art of writing a good executive summary for a business plan has largely been lost. With banks and business investors in countries such as South Africa, the US and a number of others, requiring a business plan before funding or business finance is considered, its easy to see why. So how do you write an effective and professional executive summary for your business plan?

The executive summary is the most important section of your business plan. It is normally the first section of your business plan that investors will read, and could be the last if it is badly written. An executive summary should describe the company, the product or service, and the unique opportunity your company is offering. It should also provide a short description of your management team and a summary of the investment you are seeking. Don't forget to tell the reader why you need the money and how and when they can expect to be paid back!

It creates a first impression (remember what your Mum said about first impressions!) in the Angel’s mind of both you and your business. Use clear and concise language and words that command attention, and excite your Angel. Be honest. It is often tempting to exaggerate or Gild the Lily, but you WILL get found out eventually and Angels will not be happy. Angels like the truth. Your summary should promote trust and if "just one little white lie" creeps out, Angels start to look for the others. Now you are on the back-foot.

The executive summary is neither an introduction nor an abstract; it IS the business plan in miniature. It should stand alone and be interesting, concise and clear. It should take no more than 5 minutes to read and when finished the Angel should be able to say "So that’s what these people are up to"

Here are several common mistakes that can make your executive summary less effective: Too wordy, and failing to get to the point. Angels are busy.
Trying to be all inclusive (it should be a summary)
Failing to show a unique or exciting opportunity
Failing to summarise the investment sought
Failing to generate interest in the reader

Some suggestions to combat these problems:
> Limit your executive summary to a maximum of 3 pages; 1-2 pages would be best
> Focus on the opportunity and explain why it is special > Make certain that the opinions and claims in your executive summary
are fully backed up by the other sections of your business plan.
> Use only concrete facts and figures that explain your business concept, market niche and financial projections.

Don't forget to include the details of your investment (the amount you need, what you will spend it on, and the return you offer your Angel) Keep the Angel Investor in mind - why are they reading the plan and what response are you hoping to generate?

A good executive summary should demonstrate:
A business opportunity that makes sense
A clear plan for success
A capable management team
A clear, specific, and definable market
Significant competitive advantages
A solid and believable summary of the financial projections
An excellent chance for Angels to receive a healthy return
The outline of your executive summary will vary based upon your particular business. But regardless of the format, every executive summary should include the following areas:

The Opportunity
It should immediately grab the attention of your Angel. This is often best achieved by explaining why your business is different or unique. Clarify your business advantages, how you can break into your market first, the benefit of your proprietary product, or how research supports a significant customer demand for your product or service. Essentially, what differences or characteristics will lead to success?

The Product or Service Description
Describe your product or service in terms of its benefit to your potential customers. How does it work? What is it used for? Where is it sold? How much does it cost? How does the customer benefit? Remember to limit yourself to highlights in this section. Be brief.

The Market
Who is your customer? How large is your market? Who are the competitors? Why are you better? What are your market share projections? Your reader must be convinced that potential customers will have the want, need, and ability to purchase your product. Don't try to avoid the fact that you have competitors. Instead, explain how you can gain market share with your business advantages.

The Management Team
Describe the management and how they will lead to your success. Is it clear your team is well-rounded with the experience, expertise and capabilities to achieve the goals outlined in your business plan? Does your board of directors or advisors bring credibility and experience to the table? Be warned – management weaknesses will ensure that Business Angels will go no further.

The Finance Requirements
How much money has been invested to date? What are your earning projections for the next three years? What amounts are currently required? What will the funds be used for? From whom do you expect to receive your investment? What specific return do you offer an investor? What is the exit strategy, in terms of both time and return?

At what point in the writing process is it best to write your executive summary? There are three schools of thought. The first says prepare it before you write the rest of the business plan. The second says write it before, then again afterward to combine the best of both. The third says prepare the executive summary only after the rest of the plan is complete.

Which approach is correct? It's really a personal decision, but it has been our experience that preparing the executive summary when the rest of the business plan is complete is fairly effective. This allows us to summarize the plan after all the information has been laid on the table with the hindsight of compiling the entire plan.

Remember to review your executive summary many times and ask yourself whether it grabs the reader's attention. Will they be excited about your business? Will they want to read the rest of the business plan? If the answers to these questions are no, rewrite it. Show it to a friend or business associate and ask them to be critical. Many times after someone reads your executive summary they will say "It's great, but what about…?"

Most business plans are only given any concideration once the executive sumary has been read and created enough interest for the business finance provider or investor found what they were looking for within the executive samary. Best of luck with your business plans and for business plan help, don’t be afraid to ask or seek help.

One of the co-founders of South African based Investors Network recently posted this extremely interesting blog on the site. Well worth a read.

Being involved with entrepreneurs and business investors on a regular basis now for almost a decade, it’s clear that although the financial and business landscape changes constantly, Investors needs don’t. Speak to most of the angel investors, micro finance providers, venture capital firms and entrepreneurs who have taken part in successful negotiations for gaining business investment or providing the same they will all tell you the same thing. When meeting with potential investors, if you are an entrepreneur who wants to walk away with a positive agreement you will need to have done or produce at least the following three things.

Market research
Market research at a very basic level will tell you if those who you think will be your clients are interested in your product or service. Irrelevant of how exited you are about your business idea and how many of your friends and family have shared your excitement with sympathetic nod and grin, if you have not spoken to potential clients who have said they will be happy to part with their hard earned cash for your new product, the simple fact is that you simply don’t know.
What is that you want to know at this stage?
Are your potential clients interested in your product?
How much will they be prepared to pay?
What about the product appeals to them?
Where will they look for your product or buy it?
Where do they currently look for similar products?

Investors will be interested in the information you have produced during this process. If they are new to your industry then positive responses here is what will give them confidence.

Know your numbers
The numbers behind your business is what investors are listening for while you are talking about your dreams and vision for the business. Costs are important. Will you be able to cover your costs to start with? How will the production costs – if it’s a manufacturing business and staff costs and other overheads when it’s a service based business effect the eventual price of your product and more importantly will there be enough leverage there to allow for a healthy profit. Investors are listening for information to tell them that the money they are putting in will be coming back with interest. The higher the risk you are asking them to take the more attractive the return will need to be.

Business evaluation
The final bit of information that they will be looking for is the valuation of your business. If they are asked to part with their cash for a stake in your business then what is the size of the stake that you are giving away. Be realistic with your valuation. For a new business the valuation can be based on the potential indicated by the market research, information on competitors and that they have created, other issues such as pre-orders generated, patents and the size of the market. Once ht business has been trading it will be much easier to value it as trading figures, assets and actual amount of clients can be used. When it comes to evaluation this can be used to negotiate with investors but going in with to high an evaluation to start with may loose you any chance of a deal to start with.

With banks becoming more risk averse in recent times, business investors have become a much more attractive option for many entrepreneurs. If you are an entrepreneur looking for business investment, make sure you have done your homework by the time you get to speak to investors.