Business Angels Finance Business

There has been a marked increase in the number of businesses since 1979 from 1.9m to about 4m last year. Most of them are 1 and 2 person businesses, many of which are family businesses. They are mainly small businesses. Small businesses account for most of the employment in the country. Most people employed in services, construction and agriculture are employed by small businesses.

The financing of these business like all businesses is made up from internal and/or external sources. Internal sources include the personal equity of the owner and other contributions from friends and family and external sources such as shares, bonds, government grants and capital investment by private equity firms, venture capitalists and business angels. Angels are generally thought of as good beings. Business angels are also thougth of as good. They are also servants of a kind. They are not fairy god-mothers. They will be looking for a business plan that will show they will get a return on their investment. Although they are in it for profit, business angels and other investors are also doing the economy some good. They help keep the economy going. They also help finance business operations. Business must calculate whether they want to borrow money for things like equipment. It entails looking at how much it will be worth in future. They borrow if it increases the net present value of their cash flow. They can also look for investors by selling shares and bonds. Investors use a variety of methods for calculating what to invest in and how much also looking at NPV. Borrowing and investing always involve some degree of risk.

There is no hard and fast line between venture capitalists and business angels. 'Venture capitalist' is only a sub-division of private equity and 'business angel' a sub-division of venture capitalist based on size of investment.

Venture capitalists are usually more involved in long-term financing investing millions in their chosen businesses. They often help to fund start-ups, management buy-outs, finance additional growth or buying a business. Their substantial investments are usually in the form of shares and they take a seat on the board, if not personally then through a representative. Their involvement can be for up to 5 years or more. Their returns come in the form of capital gains. Business angels are usually smaller investors offering £10,000 to £100,000 and they also often get a seat on the board. Once on the board however they can share in the administration of the business. They are in a position to show care and offer assistance. They can warn against bad advice and prevent owners and managers falling into error or worse. They are a good sign. Private equity performance compares well with pension funds or FTSE indices. So if investors have put their money into a venture it is probably good.