Although it isn’t quite clear where the term ‘business angel’ originated, there are some who believe that it was first used to describe private investors backing Broadway productions. Today the term has taken on a whole new meaning and to struggling businesses, it can feel like a touch of heaven sent to heal broken and wounded companies.
Private investors are most commonly referred to as ‘angels’ in other parts of the world, Europe and Australia in particular, but more and more often the term is being used within the United States. If you are the owner or director of a financially distressed business, this may be something worth investigating. However, there are a few things to be aware of when being funded by a business angel because they aren’t always a blessing in disguise.
What Exactly Is a Business Angel?
Business angels are generally private investors who are willing to invest money into small to medium sized businesses for a number of reasons. Usually the owner of the business is looking for funds to expand operations or to stay current on debts when times are tough. A business angel can be a breath of fresh air but they can also resemble a typhoon or a tsunami, wreaking havoc throughout an already distressed company.
Most often business angels are individuals who reached the top of the ladder within their field of enterprise and have a tidy nest egg to invest. Quite often they are retired persons who don’t want to completely leave the world of business and as a result are looking to keep their ‘hands wet’ through investment in smaller firms. They are likely to set themselves up as advisors as well as investors within the company. Herein is where problems may arise.
Define an Angel’s Role at the Onset
When a business is in dire need of money to increase cashflow, the directors or owners may entertain any offer that comes forward promising a quick influx of cash. Contracting with a business angel does sound like the answer to a prayer but it is important to understand the various levels of involvement a business angel may require.
Often referred to as a ‘silent partner,’ a business angel can be anything but quiet. Many, as noted above, are retired business men and women who would like to stay active in their field but work fewer hours. They seek to take on the role of advisor or mentor as a condition of investing in the company.
It is important to take the time to analyze what your definition of a business angel is. Do you want the financier to have an active say in day to day affairs or are you simply looking to offer a portion of profits in return for funding? For those owners and directors who have built a business from the ground up, it may be difficult to share control with relative outsiders, however knowledgeable they may be.
Before accepting funding from a business angel, consider the potential consequences. The right person could be an angel of light, but taking on financing and relinquishing control to the wrong person can be a nightmare. Business angels can be an answer to a prayer but they can also be angels with tarnished halos and broken wings. This is not a move to take lightly or without adequate legal counsel. As the old adage goes, always look before you leap.
