Entrepreneurs reluctant to commit themselves financially to their business could be torching investment prospects, as new research reveals 87 per cent of angel investors consider frugal founders as too risky to back.
In a study of over 100 established UK investors, researchers from the University of Edinburgh and the University of Glasgow’s business schools uncovered the traits and characteristics that could be the key to securing external backing as a startup founder.
As well as demanding strong financial commitment from a business owner, investors were equally keen to learn the personal characteristics of the entrepreneur. Some 97 per cent said strong leadership skills reduced risk in an investment, while 96 per cent believed familiarity with the market was reassuring.
Enthusiasm was another important factor, with 94 per cent seeking entrepreneurs with the energy to make a sustained effort to grow the business.
However, a fine line was drawn between business ambition and personal success. Some seven in ten respondents thought founders motivated by status posed an investment risk, yet two-thirds believed a hunger for wealth was a positive trait.
Curiously, just 52 per cent said detailed information on the product or service itself was vital in deciding to finance a business, while just a third believed a third-party due diligence check was important.
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With 90 per cent of business angels wanting to interview the entrepreneur personally before making an investment, angel investors continue to favour their instincts and put faith in the entrepreneur over the business concept.
Commenting on the study, Colin Mason, a professor of entrepreneurship at Glasgow’s Adam Smith Business School, said findings confirmed the importance of cash flow and sound finances to an investor.
“As independent investors, business angels must put their own money – and indeed reputation – on the line each time they invest,” Mason said.
“So it should come as no surprise they’re prudent when it comes to interviewing entrepreneurs and rigorously examining cash flow”.
Professor Richard Harrison, the University of Edinburgh’s business school chair, agreed that the personal commitment of an entrepreneur was essential in securing external investment.
“What’s clear from our study is the vital importance angel investors place in the characteristics of the business founder – their ability to lead and prior experience – as well as a founder’s willingness to invest in the venture,” he explained.
“The ‘jockey’ (entrepreneur) remains much more important than the ‘horse’ (the business), so potential entrepreneurs need to demonstrate their commitment, both financially and in their capacity for hard work. Signalling to business angels that they have the right motivations and entrepreneurial capabilities to make any investment work, should be a priority.”
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