No network, no ventureMyall Consulting's senior consultant on Business Angels Czech Republic (BACZ) and the case for networks of this sort
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Contacts – and more importantly, contacts with money – are the lifeblood of aspiring business ventures. Without the proper network, entrepreneurial ambitions are certain to flounder. Enter the business angel network… Business angels are private, wealthy individuals with an appetite for getting involved in growing entrepreneurial firms – either to realize a lucrative return, to complete their existing investment portfolio or to satisfy their entrepreneurial ambitions. Because business angel funding represents the only alternative available to companies in the initial "start-up" stage, the creation of a favorable environment for both parties is essential. This is where business angel networks come in. What are business angel networks? Business angel networks (BANs) create an environment where local entrepreneurs can present their projects to a range of private investors, and if successfully matched, can raise the funds required to realize them. Because both groups (entrepreneurs and investors) are informal in nature, their opportunities are usually limited to those found amongst their own network of contacts. BANs serve the useful function of bringing these two sides together, helping them to overcome limitations and to expand their possibilities. BANs can also provide professional advisory in the areas of business planning, market analysis, project evaluation, due diligence, and other critical matters. How do BANs operate? The operational procedure of a typical BAN is quite simple. On one side is the entrepreneur, who presents his project in the form of a business plan. Often, these business plans are structured according to guidelines or templates provided by the BAN itself. On the other side is a wealthy individual, motivated by expectations of high reward, but also by the fun and satisfaction of being involved in an entrepreneurial firm. A BAN's role is usually limited to matching the two parties based on their specific needs, arranging a meeting and advising them on the recommended approach (based on industry experience) and on the risks involved in this type of investment. The fees involved in the process include: a membership fee charged for access to the network and including all basic services such as registration, submission of templates and project revision; a "success fee" charged at the end of the process (once the deal is closed) and set as a percentage of the amount raised; and additional fees for specialized services, such as professional advisory, project preparation, due diligence, etc. What are the weak points of the process? Based on research performed by the European Commission and the European Business Angel Network (EBAN), there are some fundamental weak points that can create bottleneck and lower the overall success rate of the process. From the entrepreneur's point of view, having to execute the business planning constitutes a significant barrier. Since the majority of entrepreneurs are people without business backgrounds and experience, their projects are often not presented clearly and usually contain a significant information gap. Moreover, business plans written by entrepreneurs tend to focus more on technical aspects and are neither objective nor accurate enough to rely on. As such, BANs often "screen-out" a number of potentially successful projects. From the investor's point of view, the research points to poor quality business plans (around 80% of the total), a limited variety of projects to choose from and the entrepreneur’s inability to run the business once financed. Add to this the high failure rate of start-up businesses (estimated at 60-80% during the first year of operations), and the result is often a hesitation by business angels to recognize such investment opportunities as a viable option. Combining both sides, it's easy to spot the vicious circle where inadequate business planning cuts the wings off entrepreneurs’ plans, while a lack of good projects cuts off the capital supply. |
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