Angel investment is all about spotting and nurturing talent. This can usually be defined as a combination of people and product because neither will be successful without the other. But while angel investors often have genuinely altruistic intentions, only a successful business will generate value and a financial return commensurate with the risks involved. So before approaching an organisation, Kathy Kinder, Investment Manager at TRI Cap, advises that potential investee companies must consider carefully whether they have what it takes to attract a sophisticated investor.
At the outset, it is important to start with a good idea: one which provides a real solution to a real problem. There also needs to be a realistic opportunity for growth and an executive team able to deliver this, generating revenues which are meaningful and in line with their business plan. A balanced, focused and experienced management team is critical. These factors alone, however, are unlikely to attract angel investors without their being a clear indication of a path to a successful exit.
Few angels wish to be long-term shareholders; they are in the high risk business of providing start-up or development funds with a view to building a company to the point where their investment can be realised at a profit. Not all investments will yield a significant return and indeed many will fail. Angel investors accept this as an occupational hazard, partly compensated for by tax incentives and work on the basis that if they have a portfolio of investments, some will fail, some will return their money, some will give a modest return and hopefully they will turn up the occasional diamond.
All angel investment syndicates are different, with varying geographical or industry specialisations. With strong connections to the Borders, many TRI Cap members want to ‘put something back’ and will look favourably on any business proposal with the potential to inject commercial life into this often-overlooked region.
For TRI Cap a typical investee company will be located in the Borders, Lothians and occasionally North of England, or be considering relocation to the area. We are however open to approaches from companies based elsewhere which display potential for high growth and attractive financial returns. Our current portfolio stretches from Aberdeen to St Boswells in the East and west to Glasgow but with a concentration in East Central Scotland. We do, however, continue to give preference to Borders- based businesses.
As well as geographical criteria, most angel investment syndicates will also favour certain sectors, usually where their members have experience. In TRI Cap’s current portfolio we have a sector bias towards bio/medical devices, mainly because of individual investor interest rather than any desire to specialise in this sector. What is important to bear in mind is that it is the individual members who make investments using the syndicate for introductions, due diligence and investment support and to allow them to share the risk and exposure alongside others. So, although, as a group we aim to develop a reasonably balanced portfolio of SME businesses, it is always up to the individual as to whether or not he or she chooses to invest.
While our preference is for early stage businesses, our portfolio ranges from spin outs and start-ups to established businesses looking to expand. In our home territory of the Scottish Borders, we have also funded a management buy-in and a buy-out from an administrator; thus helping to preserve employment in our local area.
When it comes to length of investment, there is a similarly pragmatic approach. At TRI Cap we aim to hold investments for three to five years but an exit is not always possible (or desirable) within this time period and we have held a number our investee companies for considerably longer. Some need more money to achieve their exit potential and others are approaching the stage where they could be sold should a buyer be found. Several are working towards IPO/trade sale and with others we are looking to realise value in other ways.
Scotland is well served by a very active business angel community under the umbrella of LINC Scotland who have provided invaluable support and guidance over the years. Many of the angel syndicates (including TRI Cap) are also partners in the Scottish Investment Bank’s Co-Investment Fund who can provide matched funding thus bringing financial as well as practical help to our investee companies . Further afield within the UK, Europe and beyond, there are a range of investors, many with sectoral expertise, who could be the port of call for the next stage of your businesses development. There are different criteria though and it is helpful to know as much as possible about the syndicate and its membership, together with its preferred geographical areas and industry sectors, as well as its ethos and process, in order to put together the most relevant application.