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Home Page > Business > Business Angels Taking the Risk

Business Angels Taking the Risk

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Posted: Mar 29, 2007 |Comments: 0

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Business Angels Taking the Risk

By: Adrian Lawrence

About the Author

(ArticlesBase SC #123914)

Article Source: http://www.articlesbase.com/ – Business Angels Taking the Risk

When you’re building a new business, or looking to expand your old one, the first thing you’ll always need is money. Money doesn’t just grease the wheels of business, as the old adage goes – money is the wheels of business. Everything in business depends on it, and if you can’t get funding, your business plans will never even get out of the starting gate. So, what do you look for in an investor? Some investors, called venture capitalists, represent large bases of other investors and, as such, are spending their money on your project, much the way a stockbroker or investing firm works.

On the other hand, there also exists a kind of investor who invests his or her own money in starting companies. They’re taking a risk, and are often careful where they invest, but they do invest somewhere – and with the right sales pitch, that somewhere could be your company. These investors are called business angels, and work either singly or in pools of capital. They may invest now, while shares are cheap; wait a few years for your company to mature, and then sell to other stockbrokers or back to you, if you’ve made enough profit.

The problem, of course, is that business angels are investing their own capital. No one, as they say, is more careful than a man spending his own money – business angels will be very careful where and what they invest in, so you’ll have to have a bulletproof sales pitch, if you expect to succeed and get the funds you need. A key here is preparation. Before your first meeting with your investors, make sure you know everything there is to know about your company, your market, your target audience, and your locale – nothing impresses people more than a ready answer for every question and plenty of hard evidence.

Also, make sure you have a good, clear business plan. Know how many people will be on your payroll, what equipment you’ll need to buy, what office space you’ll be renting, and how all these expenses translate into profits at the end of the year. Without a clear idea of how you’re going to make money, investors will be reluctant at best. Know the means by which you’ll get your cash, and you’ll better be able to predict the results to others.

Prepare for questions before you go into the meeting. Think about what you might ask if you were in the investor’s position. Questions like “how much do you expect to make the first year,” and “how do you expect profits to rise over the next decade,” are to be expected, as well as other questions more tailored to your specific situation. Know your unique selling points – what makes you stand out from the crowd? Why should the investor choose to give money to you instead of the next guy or the next girl in line outside the investor’s office? Show them you’re unique, and you’ll de facto eliminate the competition.

Much of the way these meetings is entirely psychological. Make sure you yourself are confident in voice and posture. Know you can make money and you’ll be much more confident when you make that claim to an investor. A straight back and a strong voice do wonders and can often be even more effective than strong logical arguments for what you say.

Make sure you’re committed as well. If you haven’t invested as much of your own money as possible, investors will suspect you of scamming or of not trusting your own company. If you’re heavily invested in your company with both time and money, investors will be more likely to believe your commitment to its successful completion.

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Investors just have a hard time believing that the entrepreneur is going to make anything of their idea. A lot of investors are tending to lean towards established companies or listed companies because the returns are great (at the moment) and risk is much lower.

So the key is to lower the risk for the investor. This will greatly increase the chance of getting funding.

How to lower the risk factor for the Investor…

In a typical situation, the entrepreneur or promoter has had little prior experience building a successful company. If they had, they probably would not need an outside investor. It’s sort of a catch 22 situation, therefore the most successful approach for start-ups is to:-

1. Take their idea/concept as far as they can with their own funds (if possible get some sales or at least pre-commitments of sales from worthy buyers)

2. Raise small amounts of money from people who are close to them at a reasonable valuation (most promoters value their idea too high which is a turn off to investors). Say $10k or $20k each from a number of friends/family who are close to them and believe in the promoters vision.

3. Use those funds to get the product into the market and get one years trading/sales behind them.

A year’s trading gives them a couple of things. Firstly it proves up the business idea and demonstrates that there is a ready market for it. Secondly it proves that the promoter can start/run a business to some degree, and thirdly it gives some figures by which a basic valuation can be done from (for the next capital raising).

All of this lowers the risk for the next investor, who may be asked to put up $250k or even $1m if the opportunity/technology is great.

The next round of funding may come from a wealthy individual, professional angel investor, or even an early stage VC fund (the latter is the hardest to get funds from). The next investor may also take out the first couple of investors giving the first group an exit.

There are many other factors which can affect the promoter’s ability to raise funds such as:-

• General capital market conditions (at the moment, they are pretty good – most investors have a bit of spare money to play with)

• Appetite for their particular idea (i.e. anything in the green or clean energy sector is pretty hot at the moment).

• The promoters ability to ‘sell’ their idea or concept

• The promoters track record

• The investors personal situation (they may like the idea but have funds committed elsewhere or may be about to go on holiday)

• Luck (promoter may by chance stumble across right investor at right time)

Typical criticisms of the Investor versus the Promoter/Entrepreneur…

Investor criticisms:-

• Poor investor presentation (sometimes no presentation at all)

• Too early stage – still an idea on a piece of paper

• Poor business planning or lack of

• Business model is wrong

• Promoter does not have the skills required to make it work

• Idea is not scalable – limited market opportunity

• The sector is not favorable

• Idea/technology is easily copied (no trade marks/patents in place)

• Projections are too high

• Value entry point is too high

Entrepreneur criticisms:-

• Investor does not understand their idea

• Investor does not get back to them with an answer

• Investor wants too much of the company for their investment

• Investor wants control of the company (more than 51%)

• Investor terms are too tough (i.e money comes with many stiff terms and conditions)

The best advice is for entrepreneurs to get as much knowledge on raising capital as possible. There are many books including many by Professor Tom McKaskill (www.tommckaskill.com).

Also, get a mentor involved in your business who has a track record of raising capital and building businesses. They may not invest into your business, but knowledge is far better than capital. This is because knowledge will attract capital.

© Reuben Buchanan, Integral Capital Group 14th August, 2007

www.integralcapital.com.au

Alternative investments can not only reduce the risk of your portfolio they can also enhance its overall reward.

With stock markets looking vulnerable as high oil prices and stuttering global growth, investors are turning to alternative investments.

Here we will look at high reward one that can produce triple digit gains and can reduce the overall risk of your portfolio, so lets get started.

Definition

The term alternative investments typically refers to hedge funds, private equity investing, high return mutual funds and a selection of non-traditional investments such as land, wine, timber, art, precious metals gems and a variety of collectables.

Portfolio diversification

The concept of spreading risk among a variety of assets but was reduced to a mathematical formula in 1952 by Harry Markowtiz.

Markowitz considered how ALL the different investments in a portfolio can be expected to move relative to each other and how this affects the overall risk/return of the portfolio.

The definition of this is “correlation,” and measures how much an investor can expect different investments or asset classes to change in price relative to each other.

For example, US equity markets and real estate will move in tandem, whereas interest rate investments will move in the opposite direction to each other.

Rates Of Return

If you choose the right alternative investment, then it will not only help reduce the risk of your portfolio, but will help you get better growth.

An investor should therefore combine a number of non correlated investments to balance the risk and reward of the portfolio.

Getting lower risk and triple digit gains!

One that has high growth and low downside and has upside regardless of whether stock markets fall.

We feel land is a great investment and should be considered by any investor.

It’s a simple investment and most of the world’s wealthiest investors have made money.

Land in the right location has provided stunning returns for many investors and for the purposes of illustration we will look at Costa Rica land.

Its historical performance, not only has shown massive growth, but downside has been low. triple digit gains have been achieved in just a few years has with investments in prime locations.

Costa Rican land has also produced solid long term gains regardless of whether stocks, equities and mutual have been rising or falling.

Costa Rica land is being bought to build properties to house the growing numbers of Americans that will flock to this country.

In fact many of the problems afflicting the US and other industrialized nations is the reason that more and more people are flocking to Costa Rica

They get a better standard of living at lower cost in a peaceful country that is a paradise on earth with stunning beaches, volcanoes, rainforests and much more.

There are 70 billion baby boomers about to retire in the next 10 years and they are looking at Central America and Costa Rica in particular to live in and maintain and enhance their lifestyle.

Expect the bull run here that started 7 years ago to gain momentum and whatever the stockmakret does in the US Wont affect demand.

Alternative Investments You Don’t need to be Rich

You don’t need to be rich to consider land as one of your alternative investments and every investor can take advantage of this opportunit.

A Simple Easy and Safe investment

Land is an easy safe alternative investment you get the same rights as residents, buying is easy and you pay minimal tax!

There are many specialist companies who will help you select land that has a high potential to rise in value.

They will do the research and give you all the facts you need and you can then decide in your own time and believe us this time will be time well spent.

Discover alternative investments such as Costa Rican land and see how you can increase your wealth.

Many people have seen their retirement savings wither in the current global financial calamity. And, as a result, we are seeing an exodus of investors out of the stock markets and into the safest money investments they can find to shelter what’s left of their lifetime savings until the economy stabilizes.

We’re seeing many investors now moving their money into investments such as Certificates of Deposit and U.S. Treasury Securities whose returns likely won’t keep up with the rate of inflation because of their very low yields. But, people are settling for these low returns versus the risk of losing more in the stock markets or elsewhere. They’re scared and many don’t know where else to turn.

The truth is that investors today don’t have to settle for these sub-inflation or break-even investments. They can still find legitimate high yield investment opportunities with very low risk to principal if they just knew where to look.

So, here’s the problem: most people don’t know where to look to find legitimate high yield investment opportunities. They are so ’shell-shocked’ from their portfolio and stock market declines that they’re scared, cynical and skeptical when presented with opportunities that claim to be “high yield investments”. And, they turn a deaf ear to investments that they might have welcomed in better times.

But who can blame them? We’re seeing a resurgance of Ponzi schemes and other scams, identify theft, etc.

Fact #1: You can still find legitimate high yield investment opportunities today with low risk to your principal.

Fact #2: Many of the richest people in the world today, made their fortunes when the economies hit rock bottom. These investors chose to look for opportunities when the masses focused on despair. They recognized how stock markets and economies are cyclical by nature and they looked to the future.

So, let’s see if we can’t look to the future and spot a legitimate high yield investment opportunity staring at us right now:

Two realities that are public knowledge in America today are:

1) There is a limited amount of undeveloped, raw land available in the U.S.

2) The U.S. population is projected to grow +29% between 2000-2030.

In other words: “We’re making more people, but we can’t make any more land.”

What does this information tell us?

i) We will have approximately 82,000,0000 more people living in the United States by the year 2030. (According to the U.S. Census Bureau.)

ii) These new people will need new homes, new schools, new shopping, new businesses and new communities to support them.

So, what legitimate high yield investment opportunites does this present?

Let’s talk about “Raw Land Development”. Ever heard of it? If not, you should seriously consider learning about it right now.

This situation, of limited supply (limited amount of raw land) and growing demand (population growth) is a fundamental economic illustration of what happens when demand for a product is greater than its supply. By definition, the product becomes more valuable. Yes?

Well, the products, in this situation, would be the new homes, new schools, new shopping, new businesses and new communities needed to support the growing demand created by population growth.

This poses a tremendous opportunity for what legitimate high yield investment? How about “Raw Land Development”, the essential ‘building blocks’ of new community construction.

In December of 2004, the highly acclaimed Washington DC think-tank, Brookings Institution commissioned a research study conducted by Virginia Tech University. This study was titled “Toward a New Metropolis: The Opportunity To Rebuild America.”

According to the study, to accomodate the projected population growth, America’s future raw land development and construction needs require approximately 209 BILLION square feet of new land development between 2000 – 2030.

Estimated cost? $25 TRILLION. And, the bulk of this massive raw land development and construction expansion will be spent in 10 major metropolitan regions, which the Brookings study calls “ Megapolitans“. Plus, the study tells us exactly where these 10 Megapolitans are located.

By the way, this is happening right now!

How can investors profit from this legitimate high yield investment opportunity?

1st) By educating themselves asap about Raw Land Development

2nd) By researching the Brookings Institution study findings.

3rd) By investing in the companies that will be driving this new raw land development growth.

Raw Land Development Investment Benefits:

A) Legitimate High Yield Investment:

A proven investment option is to invest as a ’silent investor partner’ with a professional raw land development company. The key is finding seasoned, reputable companies in this field.

Professional raw land development companies or ‘land developers’ often seek outside investors as silent partners to raise capital for their raw land development projects. Silent partners have no involvement in the day-to-day management activities of the business, but they share in the net profits of the project. In addition to profit sharing, some professional raw land developers also will pay high yield interest to their silent partners for the use of their money until the principal is returned.

B) Legitimate Low Risk Investments:

It is regular practice for professional raw land development companies to back their silent investor partners’ principal investments with project assets (e.g. the value of the land itself). This means that in the event of a developer default (heaven forbid), the project assets can be sold and the silent investors can recoup some or all of their principal plus any net profits.

In addition, for added security, silent investor partners are commonly placed in First Position for the raw land development project’s assets and revenue. This means that in the event of a developer default, if the project’s assets must be sold, the silent partners will be the first in line to be paid. (Similar to when a bank holds the mortgage or first deed on a home.)

IMPORTANT NOTES:

I. Per industry averages, a professionally managed raw land development project will increase the value of raw land by 2-5 times its original cost. In other words, a professional land developer will typically sell a completed raw land development project for 200-500% more than they paid for it originally as undeveloped, raw land.

II. It is widely held that real estate investment has created more riches than any other form of investments. Taking that one step further: Raw Land Development is the most profitable form of real estate.

III. For these reasons, professionally managed raw land development investment has been the cornerstone for many of the world’s wealthiest investors’ investment portfolios for generations.

Until recently, participation in raw land development projects was restricted to the very rich due to the exorbitant minimum investments required (often $1 Million +).

However, this has changed in the past several years, with some professional land developers dramatically reducing their minimum investment rquirements to allow smaller-scale investors to now participate in these legitimate high yield investments.