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The 'Acid' test in approaching Business Angels

Although there is now an unprecedented number of funding options available to owner managed businesses in terms of lending, many still choose to follow the route of raising equity finance from Business Angels and Venture Capital.

When it comes to accessing lending then have a look at our Money, money, money blog.

Regardless of the quality and viability of the business proposition, not every deal is suitable for lenders to support.  Likewise, a deal that is attractive to a lender won’t provide the sorts of return that a Business Angel needs to see.

Approaching a Business Angel is fundamentally different to approaching a bank or other lender.

Because the risk level that a Business Angel takes on is so much higher than that of a lender you should expect a much greater level of interrogation of your business plan and financial forecasts.

There is however a key emotional milestone that business owners need to pass before they should even consider approaching a Business Angel (or any other type of equity investor).


Having worked with many businesses that are looking to raise equity finance there is one significant hurdle that we need to see the business owner clear.

It is the point at which a business owner moves from being someone that needs to be told what they want to hear to one that wants to be told what they need to hear.

We use a self imposed test that we call the Victor test. This is not a clever acronym but simply a Business Angel that we have worked with for years who has personally invested more than £3m in owner managed businesses and thus far realised £5.8m from exits.

If we feel a proposition will pass this test, we waive our up front fee. And to be clear it is not a test about whether Victor would invest, it is a test about whether we would be happy to put the proposition to him.

We were recently approached by a business that had invented a truly game changing adaptation of some existing technology - so big ticks all round , this was technology already in use and their redesign opened up a previously unreachable market. 

The directors sent over their business plan and five year financial forecasts, all of which had been professionally prepared.

We encountered a number of problems:

  • The business plan was lacking - it was comprehensive, impressively branded, but technically focused and lacked key elements;
  • Valuation - the investment sought and equity offered represented a valuation more than 15 times higher than we thought reasonable… we always push the envelope on valuation but there are limits;
  • Financial forecasts - whilst they were comprehensive they were poorly constructed and confusing; timelines around key milestones made no sense;
  • Directors pay and benefits - the directors had allowed for significant increases in their own earnings to a point where almost one third of equity they were seeking would be paid out to them! Victor would have loved that!

Having read through everything and concluded that this was not something that we could, in it's current form, take forward we sat down with the directors to offer our observations and feedback together with an action list which would allow them to revise and represent it to us.

Sadly they were simply not ready to hear what we had to say. 

They took constructive criticism as personal insult, insisted that what they had provided to us should simply 'be put to our investors' and suggested that we shouldn't waste any more time on something that we clearly didn't understand.

Last we heard they were still without funding.

So before you take the plunge to raise equity finance, please decide if you are at the stage where you want to be told what you need to hear.

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Need help and advice?

To chat through your options feel free to drop me a line at phil@nbsadvisory.co.uk, or complete the contact form or call +44 7596 537289