An angel, when used with reference to funding a new business, is actually an individual investor that typically invests at the very early, pre-revenue stage of a business. Like any investor, they want to see a return on their investment but they’re also motivated by a desire to see new and innovative businesses succeed – sometimes for the sake of innovation itself.

A typical angel investor will invest in a business that’s part of an industry that they understand intimately and are probably still involved in day-to-day. They will more than likely want to offer advice and support to the business they have invested in so it’s not just about the money. If you’re seeking money from an angel investor then it is perfectly normal to allow them some type of influence regarding strategy and direction.

The amount of money you might expect from an angel investor is in the range of $10,000 – $100,000.  This could be even more if they are from an organised group of angels like the Australian Association of Angel Investors (AAAI). AAAI has sub groups in just about every major city in Australia.

In summary, an angel investor is:

• An individual investor
  
• Someone willing to invest in early-stage or start-up businesses
  
• Investment amounts: $10k – $100k, sometimes a bit more, groups could go up to $1m
  
• Have experience and contacts to contribute
  
• May be willing to be “hands-off” or “hands-on” adding important skills.
  
  

So now your business is up and firing and you’ve built a solid platform that’s generating cash. You might now be in a position to seek funding from a venture capital fund. A venture capital fund is money that is managed on behalf of others – typically large institutions. Some venture capitalists like to invest in a business immediately after a business has moved beyond the initial angel investor stage. Others prefer to wait a bit longer before they invest and will only be interested after a business has received a first, or even second round of venture capital investment.

Venture capital firms will be focused heavily on financial returns and businesses that offer a lot less risk than early stage start-ups. While angel investors limit their investments to relatively small amounts, venture capitalists tend to think of a starting point for funding to be around $1 million.

You will find that a venture capital fund expects to exercise more direct control over your business. They will do this by setting achievable milestones for your business and by having at least one seat on your board.

In summary, a venture capital firm is:

• A company or business rather than an individual
• Seldom interested in early-stage start-ups, unless compelling reason (eg. high tech with already successful founders)
• Investment amounts: +$1M up to $10m
• Have deep industry contacts
• Require seat on board
• Operate as a general partnership (GP) with limited partners (LPs) as investors
  
  

Understanding the difference between an angel investor and a venture capital firm is pretty straight forward. You probably already have an idea of the one which is right for your business. Finding them and getting them to invest in your business is the difficult part. Those seeking Angel investment in Australia can get started with websites like:

• the Australian Association of Angel Investors; or
• the Entrepreneur Investor Network; or
• Find Angel Investors; or
• the Australian Investment Network.
  
  

Venture capital firms will be more difficult to contact. They receive hundreds of applications from companies across many different sectors. The prominent firms include:

• GBS Ventures
• Starfish Ventures
• One Ventures
• Square Peg Capital
• Yuuwa Capital
  
  

There are many more and the focus tends to be on IT, Biotech or Cleantech companies. There are funds that invest in more traditional sectors like manufacturing or consumer goods. These include CHAMP Ventures or CVC Ventures among others.

In addition, there are service providers that offer introductions to both Angels and venture capital firms like Wholesale Investor – where I currently work. Wholesale Investor has a subscriber base of over 8,600 High Net Worths including retired CEOs, C-Suite Execs, Family Office trusts, Entrepreneurs, and others.

Guide for business owner:

• Can you show proof of concept for your product or service and is it sustainable?
• What experience do you have within your chosen sector or more broadly as an entrepreneur?
• Who are your key backers, or advisory board members?

Guide for business owner:

• Do you have an exit strategy for investors (IPO, trade sale, share buy-back, etc)?
• What is your commitment to this exit strategy?
• What might interrupt the path to achieving some type of exit (risks)?

Guide for business owner:

• Is your business moving up the growth curve or burning cash?
• How are you going to maximise the strategic value of your business? (NOTE: strategic value is not a multiple of profits)
• Can you name four companies that might buy your business one day?

Assuming you have a unique product or service that has a market, an investor will basically want to see that you have everything at stake. The founding father of venture capital in Australia, Bill Ferris, who now runs CHAMP Private Equity went as far as asking, “Do the owners of this business have their life on the line for this?”. He used this as part of his checklist when assessing potential investment in private companies so it is no exaggeration.

If you can answer the questions above with objective facts then you will be in a much better position to raise capital from Angel Investors, Venture Capital funds, High Net Worth individuals, Family Office trusts, or any other form of surplus capital.

A shareholders’ agreement, or ‘business will’, is an agreement that attempts to regulate the conduct of those starting a new business venture. It is essential too for those seeking funds from new investors.

I wanted to focus this week on seven must-have terms for any shareholders agreement. To do this I spoke to Kristie Piniuta from Kubed Legal in Melbourne. A big thanks is due to Kristie who put together the list of seven based on her broad depth of experience as a corporate lawyer. This has included time spent working in-house for Boost Juice alongside Janine Allis. The seven must-haves include:

Drag-along rights enable a majority shareholder to force a minority shareholder to join in the sale of a company. The majority owner doing the dragging must give the minority shareholder the same price, terms, and conditions as any other seller. This ensures a clean sweep of of minority shareholders in the event of a full sale or acquisition.

Tag-along rights are used to protect minority shareholders. If a majority shareholder sells his or her stake, then the minority shareholder has the right to join the transaction and sell his or her minority stake in the company.

This is especially important for businesses with a lot of intellectual property. That’s not to say it is any less important for other businesses who have lots of cash flow and very little IP. Non-compete periods have to be reasonable in scope and duration to ensure enforce-ability. A confidentiality clause is obvious for a number of reasons and it is a commonly used for other contractual agreements like employment agreements and non-disclosure agreements.

The cost of a full shareholder’s agreement “starts at about $A2,000-$A3,000″ according to Kristie from Kubed Legal. This is the bare minimum and the cost will increase depending on the complexity and number of shareholder requirements.

Hopefully the terms above highlight a few key points for business owners embarking on a capital raising mission for the first time. If all parties are fully informed and provisions are drafted appropriately, a shareholders agreement should be able to sit in the bottom drawer gathering dust until a situation arises where it needs to be consulted. The cost of the agreement pales in comparison to the cost of a legal dispute if an agreement is not put in place.

Please feel free to contact Kristie at Kubed Lawyers at [email protected] if you have any further questions or if you need a shareholder’s agreement drafted.

Disclaimer
This article is general in nature and cannot be regarded as legal advice. It is general commentary only. You should not rely on the contents of this article without consulting professional advice from a corporate lawyer or adviser.

I came across an article recently on Forbes.com written by Alison Johnston. Alison is the CEO and co-founder of InstaEDU, an online education business that helps students get high-quality, one-on-one academic support, on-call. Alison talked about 5 tricks for finding investors for a startup. The article was written based on her personal experience raising capital for InstaEDU. I thought it would be useful to adapt the article for Australian start-ups.

Alison made a good point early on that even when you’re ready to start talking to investors, one of the most challenging parts can be just that: actually talking to investors. Most venture capitalists and angel investors see dozens of pitches every month and simply don’t have time to meet with everyone. To make it more difficult, it’s not uncommon for first-time entrepreneurs to need to speak with 50+ investors before closing a round of funding. The good news is that there are now more resources than ever to help you source investors. Here are five tricks that Alison used to get meetings with the right investors for InstaEDU.

Services like the Australian Investment Network cater for entrepreneurs looking for startup funding in their business. A site like this is a good way to both learn about investors and for them to learn about you. Creating a profile—including specific info about your company, product, and team members—makes it easy for people who are interested in your space to find you.

Another good site is Angel List. There a number of Aussie startups on this site. Once you’ve completed your listing on Angel List, share your profile with your friends and professional acquaintances and request references. Send a personal note to your followers to try and start a dialogue with them.

If you are fortunate enough to get some followers for your business via a lisiting or other method then you want to focus on those investors who are going to be a good fit for your business. The chances of raising equity funding via a single meeting are pretty slim so being to restrictive on those that you meet with is not recommended. Cast the net wide.

On sites like AngelList you can make a list of people who have invested in the sector which you operate. You can take this to list other entrepreneurs and ask for their thoughts on who you should add or remove from the list, based on their experiences. Entrepreneurs who’ve been there/done that are an invaluable resource for helping you identify potential investors. They can also flag  investors known for being difficult to work with or who aren’t actively investing.   Put a list of people into a spreadsheet and include their sector of expertise (when applicable), mutual connections, relevant investments, location, and any other notes (e.g. has a wife and 3 kids).