Financing new ventures : an entrepreneur's guide to business angel investment

270 Pages·2014·3.23 MB·English

by  Gregson

THE BUSINESS Financing New Ventures G Babson College Entrepreneurship
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EXPERT PRESS An Entrepreneur’s Guide to Business EG Research Conference Collection
DIGITAL LIBRARIES S
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Angel Investment N Andrew Zacharakis, Editor
EBOOKS FOR Geoffrey Gregson
BUSINESS STUDENTS
Many business ventures today are looking to attract ex-
Curriculum-oriented, born-
ternal financing, with an emphasis on business angel
digital books for advanced
investment. Inside this text, the author incorporates
business students, written Financing
the views of business angels, venture capitalists, entre-
by academic thought
preneurs, and legal advisors; and draws upon the latest
leaders who translate real-
academic thinking on financing new ventures, providing
world business experience
comparisons between business angel and venture capital New Ventures
into course readings and
investing to further inform the reader. The concepts, prin-
reference materials for
ciples, and guidelines presented can help you and any
students expecting to tackle
entrepreneur, business support agency, business student,
management and leadership
and others interested in raising external investment and An Entrepreneur’s
challenges during their
in developing an “investable” business.
professional careers.
The book is organized into seven chapters covering: Guide to Business
POLICIES BUILT • Fundamental concepts of entrepreneurial venturing FI
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and entrepreneurial finance A
• Unlimited simultaneous • Market conditions from which investable businesses NC Angel Investment
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• Perpetual access for a • The post-investment relationship between entrepre-
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• Recent trends affecting how entrepreneurs raise fi- T
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nance that include strategic exits, “super angels,” R
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• No license to execute
Geoffrey Gregson is a Director of the Centre for Entrepre-
The Digital Libraries are a
neurship Research at the University of Edinburgh Busi-
comprehensive, cost-effective
ness School, United Kingdom, and a visiting professor at
way to deliver practical
EADA Business School in Barcelona, Spain. He earned a Geoffrey Gregson
treatments of important
PhD in Management, LLM in Intellectual Property Law,
business issues to every
and MSc in Social Science Research from the University
student and faculty member.
of Edinburgh, an MBA from the University of Calgary, and
BPE from the University of Alberta. As an entrepreneur, he BABSON COLLEGE
started up and managed two ventures and has experience
as Chairman and non-Executive Director with UK-based ENTREPRENEURSHIP
For further information, a
and international start-ups.
free trial, or to order, contact: 
RESEARCH CONFERENCE
[email protected]
Babson College Entrepreneurship Research
www.businessexpertpress.com/librarians
Conference Collection
Andrew Zacharakis, Editor
ISBN: 978-1-60649-472-1
www.businessexpertpress.com www.businessexpertpress.com
Financing New Ventures

Financing New Ventures
An Entrepreneur’s Guide to
Business Angel Investment
Geoffrey Gregson
Financing New Ventures: An Entrepreneur’s Guide to Business
Angel Investment
Copyright © Business Expert Press, LLC, 2014.
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted in any form or by any
means—electronic, mechanical, photocopy, recording, or any other
except for brief quotations, not to exceed 400 words, without the
prior permission of the publisher.
First published in 2014 by
Business Expert Press, LLC
222 East 46th Street, New York, NY 10017
www.businessexpertpress.com
ISBN-13: 978-1-60649-472-1 (paperback)
ISBN-13: 978-1-60649-473-8 (e-book)
Business Expert Press Babson College E ntrepreneurship Research
Conference Collection
Collection ISSN: Forthcoming (print)
Collection ISSN: Forthcoming (electronic)
Cover and interior design by Exeter Premedia Services Private Ltd.,
Chennai, India
First edition: 2014
10 9 8 7 6 5 4 3 2 1
Printed in the United States of America.
Abstract
This book provides guidance on what makes a new venture more likely to
attract external financing, with an emphasis on business angel investment.
The author incorporates the views of business angels, venture capitalists,
entrepreneurs, and legal advisors; draws upon the latest academic think­
ing on financing new ventures; and provides comparisons between busi­
ness angel and venture capital investing to further inform the reader. The
concepts, principles, and guidelines presented in Financing New Ventures:
An Entrepreneur’s Guide to Business Angel Investment will be relevant to
entrepreneurs and investors, business support agencies, business students,
and others interested in raising external investment and in developing an
“investable” business.
The book is organized into seven chapters, with Chapter 1 intro­
ducing key topics. Chapter 2 covers fundamental concepts of entrepre­
neurial venturing and finance. Chapter 3 discusses the market conditions
from which “investable” businesses emerge and provides guidelines for
building an investable business case, which considers business models and
plans. Chapter 4 describes the investment process and guides the reader
through the stages leading to an investment deal. Chapter 5 examines deal
negotiation between entrepreneur and investor and the c ommon provi­
sions contained in an investment deal agreement. Chapter 6 examines the
relationship between entrepreneur and investor post investment and the
different strategies by which investment returns are realized (e.g., trade
sale, merger, initial public offering). Chapter 7 discusses recent trends
affecting how entrepreneurs raise finance that include strategic exits,
“super angels,” and the emergence of “crowdfunding.”
Keywords
business angel, entrepreneur, private equity investment, new venture

Contents
Preface �������������������������������������������������������������������������������������������������ix
Acknowledgments ����������������������������������������������������������������������������������xi
Chapter 1 Introduction .....................................................................1
Chapter 2 Entrepreneurial Venturing and Financing .......................11
Chapter 3 What Makes a Compelling Business Angel
Investment Opportunity? ................................................59
Chapter 4 Understanding the Business Angel Investment Process ...103
Chapter 5 Deal Negotiation and the Deal Agreement ...................139
Chapter 6 Investment Management, Staged Financing,
and Exits .......................................................................173
Chapter 7 Summary and Future Trends .........................................203
Appendix A ���������������������������������������������������������������������������������������221
Appendix B ���������������������������������������������������������������������������������������225
Appendix C ���������������������������������������������������������������������������������������227
Appendix D ���������������������������������������������������������������������������������������229
Appendix E ���������������������������������������������������������������������������������������231
Notes �������������������������������������������������������������������������������������������������235
References ������������������������������������������������������������������������������������������241
Index ������������������������������������������������������������������������������������������������249

Preface
Welcome to Financing New Ventures: An Entrepreneur’s Guide to Business
Angel Investment� This book provides a practical guide— informed by
contemporary academic t hinking— for the entrepreneur seeking to raise
business angel (BA) investment. The book also provides an informed per­
spective for entrepreneurs seeking to understand how an investor might
see their business.
The decision to raise external equity financing is a significant step for
any entrepreneur and requires careful consideration of the advantages as
well as the trade­ offs. The entrepreneur or founders will be required to
give up ownership stakes in their business and may give up full autonomy
over business decisions. In return, they are able to access financing to fuel
business development and growth and to receive business and mentoring
related support that is not possible with other funding sources.
If you are an entrepreneur, you have a much better chance of rais­
ing investment from a BA than from a venture capitalist (VC). The high
investment returns demanded of VCs, combined with the high risk and
uncertainty in financing a new, unproven business, has seen VCs move
away in recent years from the early­ stage market, leaving this space open
for a flourishing of BA activity.
At the same time, entrepreneurs need to be realistic when raising BA
investment. Only a small percentage of new ventures successfully raise
investment— many simply don’t meet basic BA investment criteria.
Sometimes entrepreneur aspirations and investor expectations don’t align
because the value of the business is perceived differently. A commonly
observed challenge is the entrepreneur’s uncertainty over what constitutes
an investable business and what will be required in the process of raising
private equity investment.
The book provides guidance on what makes a new venture more likely
to attract BA investment and presents this within a wider discussion of
contemporary academic thinking on financing new ventures. Compari­
sons between BA and VC investing are provided throughout the book to
further inform the discussion.