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The Magic of Angel Investors

By Kenneth Kwama

In his circles, Mr George Miseda is known as the ‘small man’ who stumbled onto big business. But Miseda, the entrepreneur who now runs a high net worth company says his fairy tale story was bound to happen.

It started in 2005 after the collapse of a successful print and advertising company he was jointly running with three co-directors. The company ,called Corporate Exposure, folded because of a disagreement among directors.

Two years ago, Miseda formed another publishing firm, Asset Link, and approached a business support consultancy called Sacoma to help him through the initial phases. Miseda said through Sacoma, he got to know an overseas company that joined in a partnership, which gave the impetus for growth.

In business terms, the investor that gave Miseda the means to expand is referred to as an angel investor. Ms Perez Ochieng’, the CEO of Sacoma, says this is one way through which small enterprises can raise finances for their operations.

"Angel investors are individuals who personally invest directly in a business. Often, they invest in early stage business," says Ochieng’.

Traditionally, an angel is a successful high net worth individual (s) looking to get involved in a growing business for various reasons, ranging from seeking opportunities to use their expertise, tax benefits or even shrewd investment opportunities.

In the US, it is estimated that more than $20 billion is invested in start up or young growing companies by angel investors.

Convinced

"Ordinarily, they look for a sound business plan that clearly demonstrates how the business will work. They want to be convinced that the management will be able to implement the plan," says Perez.

While angels are more patient compared to

other lenders like banks or shylocks, they are usually keen to know how soon the business will be profitable. Generally, they don’t want to be the sole source of funding and seek to know where future investment capital is likely to come from.

Sacoma has been particularly helpful in linking new business owners with business angels and Perez says the method is suitable in the current situation where banks and other lending institutions are reluctant to fund small businesses.

Angel investors, she says, may be inclined to fund very early stage companies and also take greater risks.

Although Miseda says he didn’t get direct financial assistance from the overseas company, he contends that the relationship and network has helped him grow his company to a high net worth firm.

Financing vehicles

Besides one’s own savings, banks are the other primary financing vehicles for small businesses however, lending terms have been a bit stringent because of the hard economic times and inflation that are currently driving default rates to record highs in the country.

Many small and medium enterprises also suffered the pangs of the post-election violence, which wiped out most of entrepreneurs meagre savings, making it difficult to acquire properties that could be used as collateral to get bank loans.

Banks like to use hard assets like buildings, motor vehicles or equipment as collateral against loans. They also loan against receivables and business inventory, but have been hasty in the case of smaller businesses.

Ultimate protection

"While banks like the ultimate protection offered by hard assets, they also want to feel that there is little chance that the business, or the bank, will have to call upon these assets to pay off the loan," says Perez.

Ordinarily, banks don’t bother much about a business’s ability or potential to earn profits, but are more interested in the business’ ability to cover the principal and interest payments.

Another source of funds for start-ups that is often mentioned is friends and relatives, but the option has often been touted as good only for those willing to swallow their pride.

"Friends and relatives can be irritatingly demanding. In fact they are not the best source of funds because you’ll be constantly in touch with them and that is a constant reminder that you owe someone money, but they can work if you are really serious about starting or staying in business," says Perez.

If your friends and family are interested in assisting you with your business financing, Perez advises that this should be done professionally. She says entrepreneurs should make a sound, cohesive loan request presentation just as you would to a bank or other lending source.

"Don't be embarrassed to show financial statements, tax returns, or whatever else they want to see. Do anything to get that money as it will help you start or stay in business," she says.

Small businesses can also secure funding through "equity financing" or "debt financing." Equity financing means that you sell stock in your company to a buyer, who then has an ownership interest in your company. Debt financing means that you owe the person who holds the debt the amount borrowed.

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