Sharing The Spoils
Small businesses and their owners can benefit greatly from receiving assistance from business Angels in the form of private equity capital. Depending on your outlook, finding investors for a new venture could be seen as an exciting challenge or a daunting task. Either way, it is imperative to the success of many serious start-ups and just might mean the difference between expansive growth and closing the doors before you have even had a chance to get your footing.
While some entrepreneurs might see the immense benefits of the financial support and wisdom that seasoned business people associated with private equity capital can offer, they may fall short of getting excited about giving away equity in their company. The fear of having to give away too much of their ownership can sometimes push some small business owners towards focusing on obtaining just one business Angel to provide funding. This might be a little short-sighted as there are certainly plenty of advantages to inviting more than one Angel to the party.
Potential investors may also see the benefit of teaming up with other Angels to minimise the risk of their private equity capital investment, as well as bringing in even more expertise to increase the venture’s probability of success, though they will each have to take a smaller share of the rewards.
While there are both pros and cons to co-investing in companies during different stages of their growth, we need only look at the Angels already engaged in this practice, and enjoying how well this type of private equity capital investment can work out for all parties involved, to see that this might not be such a bad idea.
For example, Peter Jones and Theo Paphitis of Dragon’s Den fame regularly find themselves engaging in a bit of joint investing. Jones and Paphitis have co-invested on numerous occasions, which seems to have worked out to the benefit of all involved. The business owner gets the private equity capital they need to expand their venture and benefits from the wisdom that these two savvy businessmen bring to the table. Meanwhile, the aforementioned Angels benefit from splitting the risk of providing private equity capital to the entrepreneur. In addition, having both of their brains on the project is undoubtedly better than having only one, which means that the forecast for the potential gains each will make off of this investment will be even brighter.
So, let’s break down the pros and cons of venturing into the realm of co-investing with private equity capital.
Pros for investors:
- No matter how confident you are in your ability to spot the winners from the losers in the game of private equity capital investment, there is always an element of risk involved. Co-investing spreads this risk, minimising potential losses should the unthinkable happen and an investment goes bad.
- Each investor may bring something different to the table in the way of experience, contacts and specialised knowledge, which will combine to enhance the prospects of the business and, therefore, of their investment.
Pros for the entrepreneur:
- More than one Angel means more than one expert offering up their wisdom, contacts and skills to steer your business in the right direction.
- You have the potential of bringing in more private equity capital when opening the door to more than one investor.
- Future rounds of funding may be easier to obtain with several prominent investors already on board.
Cons:
- Business owners will most likely need to give away more equity than would be necessary with only one Angel involved, as each one will want a decent share.
- Investors will have to share the spoils, and if their share is not large enough you may find them more reluctant to contribute their expertise.
- Is more people step up to the helm of the corporate ship, the chance of egos getting in the way of good business sense increases.
When it comes to investing private equity capital, the potential effect of more than one Angel can lead to great things. The pros outweigh the cons in almost every situation, which makes sharing the spoils a lot easier to swallow when you know that there will very likely be significantly more spoils to share.
Image © GViciano
