If there’s one thing new businesses are short of, it’s money. Fortunately, angel investors are attracted to start-ups of all shapes and sizes, and New Zealand has a well-established network of angel investors operating in both formal and informal groups.
Among them is ICE Angels, our largest angel group, with 140 members. Director Ken Erskine says ICE Angels has invested over $48 million in Kiwi startups since 2003.
“Most startups require some form of external funding,” says Erskine. “The most common start point is from the entrepreneur’s own sources and connections. “Banks will usually support startups, but the extent to which depends on the credit history and assets of those looking to raise funds.”
While it’s not necessary to be part of an incubation programme to connect with angel investors, it pays to be prepared and to understand the process.
“Most angels are looking to invest in companies with paying customers,” says Erskine. “Typically, an angel investor will look to take a minority stake in your business – somewhere from 15-25% up to a top-end valuation of $2 million, and usually around $1.5 million.”
If you need funding to develop a new product or business concept, then you’re after seed investment, which could cost you a 25-35 percent stake in the company, he says.
Five golden rules
• The best way to secure funding is by being confident but realistic.
• Understand that an idea alone is of little or no interest.
• The later you look for investment and the better validated your start-up, the higher its value and the less of the company you’ll need to give away for each dollar of investment secured.
• Remember: investors have a choice.
• Don’t neglect the exit strategy. Investors need to know when/how they’ll see returns on their investment.
What angels will ask?
• How good is the team and what’s its track record?
• How well validated is the product or business? Are there paying customers?
• Is the business scalable and is there a significant addressable opportunity?
• What’s the business’s competitive advantage and unique proposition?
• What will the investment funds be used for?
• What is the exit strategy to realise a gain from the investment?