Consulting » INSIGHT – Angels with deep pockets needed to get start-ups off the

Chris Ward was stuck in a motorway jam between Durham and Darlington when he had the idea for his company. He explains: “It was raining cats and dogs. I looked around and there were so many lorries without any loads that it struck me there and then – there must be money to be made in helping to find the loads for lorries on their return journeys.” Two years later, Ward took a redundancy payment from the engineering company where he was a manager and founded Backloaders – a kind of dating service which matches hauliers to customers with loads. But his redundancy cash wasn’t enough to get the business off the ground and he needed an extra £30,000 to get Backloaders moving. Enter John Williams, a former managing director of Luxfer, an Alcan aluminium group subsidiary. Williams had taken retirement at 50, but didn’t want to bow out of business. “I was looking for an investment of less than £50,000 in a company which was near to where I live,” he says. Becoming a business angel gave him what he wanted: through the scheme, he provides equity capital and takes a management interest in a growing business. “I felt that haulage was an interesting sector and that Backloaders filled a promising niche,” he says. “Just as important, the chemistry between me and Chris was right.” For a young company, a business angel can prove an attractive – if not the only – source of funding. Angels mostly stump up around £10,000 to £30,000 per investment, but some companies attract teams of angels to put up larger sums. There are now thought be around 18,000 of them looking for investments in the UK, according to research by Professor Colin Mason of Southampton University. And they invest around £500m a year in about 3,500 businesses. For example, security company TLD International attracted three angels who put in a total of £194,000 equity funding, plus £41,000 in unsecured loans. Each angel took 27.5% of the equity. In this case, the angels grabbed the lion’s share of the equity. In other cases, they might take smaller amounts, depending on the size of their investment and the nature of the business. Most business angels are high net worth individuals with business backgrounds – about one-in-five are millionaires. Typically, they invest between 5% and 15% of their portfolio in small ventures. According to Mason’s research, their motivation is mainly financial gain through capital appreciation – with the fun and challenge of being involved with an entrepreneurial business an important secondary motive. Yet a start-up on the look-out for this form of finance should realise that angels are no patsies. On average, they reject seven out of eight opportunities they look at. If your start-up is in technology it stands more chance of attracting angel’s cash – 30% of investments are in technology-based businesses. For the angels, rewards are potentially high – but so is the chance of losing all their cash. Mason’s research found that one-in-five investments produced average annual returns of more than 50%. But one-in-three of the investments involved a total loss. A further one-in-seven generated a partial loss or broke even in nominal terms. Yet the level of business angel activity here is well below that in the United States. Robert Drummond, a former venture capitalist who is chief executive of the National Business Angels Network, says, “In the US there are two-and-a-half times as many per head of population.” He adds that the UK should aim for a comparable number of angels. A key issue for both angels and the companies that attract them is to define “exit strategies”. On average, angels realise their investments in the most successful enterprises after four years. The other side of the coin is the failures, where angels have lost their money – usually within two years. Mason’s research found that 40% of investments were written off, 26% resulted in a trade sale, 16% in a sale to other shareholders, 10% in a sale to third party, and 8% in a flotation. At Backloaders, Ward now has 250 members paying £200 a year for access to his database of loads looking for empty lorries. Now he’s searching for two more angels to put up £50,000 to expand the business further. For more information, call the National Business Angels Network on 0171 329 2929.