Investors can transform businesses when they get involved in start-ups —and contrary to popular opinion it’s not all about the money.
Scotland’s vibrant angel investor scene is “the envy of the world” thanks to its unrivalled infrastructure and Government backing, not to mention the country’s wealth of business nous and experience.
But most of us, young companies included, are unsure how investment works, and what potential investors are looking for.
“These guys are doing it to get a financial return. They have been successful at making money. They want to make more money and they are ambitious about that,” said Gareth McGee, partner at Scott-Moncrieff business advisors and accountants.
“Having said that, all the angel investors I know have a strong sense of wanting to give something back. The entrepreneur is not just getting their money, they are getting the wisdom and experience that has come from their years in business.”
Evelyn Simpson, who started her career in investment banking, is a fine example of this.
She has lived all over the world, including the USA, Hong Kong, China, Belgium and Switzerland. During this time she took on all kinds of paid and voluntary roles, from executive business coach to yoga instructor, before moving back to the UK three years ago.
“I got involved in angel investing because I had quite a messed-up CV,” she joked.
“When I looked at all the experiences I had, I thought maybe I could be of value to small companies, while developing my own business skills at the same time.”
She has a wide portfolio of investments, tending to work with medical technology firms. When asked what she liked about it, she quite simply said it was interesting.
“Of course I enjoy the financial side of it, but it’s not just that. I am a pretty curious person and I love learning about businesses, I love learning about what people are doing. You see all kinds of different ideas and it’s fascinating to see what entrepreneurs are doing,” said Evelyn.
Jonathan Harris, editor at Young Company Finance, said there can sometimes be a misconception among entrepreneurs that getting an angel investor on board restricts their control of the business and its independence of action.
"Young companies sometimes see business angels as simply providers of cash and nothing more, but the angels themselves often want to do more, providing advice, contacts, and moral support through the difficult early years,” he said.
Gareth agreed, and added this attitude often led to entrepreneurs thinking they were ‘giving away’ a part of their company, rather than gaining an experienced, connected partner.
“Angel investors look for the right people to invest in, and they like people with the right attitude. They like commitment and passion. Sometimes investors can get frustrated when people get very protective of their product and don’t understand that the investor is trying to make it a success,” he said.
Scotland has a wealth of angel investor networks, and the Scottish Investment Bank, which matches the investments made by many of them, offers a model vital to the country’s economy.
“I have been doing this for 20 years and it has been great to see how the angel investing scene has really exploded. It’s gone from a few people doing it round a kitchen table to an infrastructure that’s the envy of the world,” said Gareth.
“And we need it. The banks are completely absent from early stage business. That’s why angels are so important, because no one else is doing it.”
That doesn’t mean it’s right for everyone, he explained. Only those with determination, vision and a clear exit plan need apply.
“This kind of investment is not for lifestyle companies that are bobbing along quite happily making their owners a living,” he added.
Making sure you fit that bill is only the first step, the next involves making sure you are ready to work hard to achieve your goals.
“Have your eyes open and understand what you are getting into,” said Evelyn.
“Angels mentor and help entrepreneurs to be successful. It’s really important to understand if you have an angel, you will have someone pushing you toward growing your business,” Evelyn said.
That advice is equally valid for investors themselves, who need to learn to spot a winning team as well as a winning idea, and to diversify their portfolios to cover the risks.
“A lot of people are looking for the ‘unicorns’ that will be sold for millions, but the truth is most investments are not unicorns. When you look at a portfolio of 10 investments you might get two that fail, two might be a fantastic success and the rest may get to exit and may not,” she said.
“You have to look at each investment and ask is there the potential to get 10 to 20 times your money back.”