START-UP founders need to put their money where their mouth is if they want to attract investors, new research claims.
The University of Edinburgh Business School and the University of Glasgow’s Adam Smith Business School surveyed 127 angel investors, with 87 per cent saying they would not back an entrepreneur who had not made a significant financial investment in their own venture.
An overwhelming majority (96 per cent) of the angels thought that founders that were familiar with their market were a less risky bet, while 97 per cent said that demonstrable leadership skills would make them more comfortable investing.
When it comes to number crunching, 90 per cent of the individual investors said that interviewing founders was important, while 87 per cent felt that cash flow was the most significant factor.
In contrast, just 52 per cent said that detailed product information was vital in deciding whether to finance a venture and only 36 per cent believed that independent due diligence carried out by a third-party accounting or consulting firm was important.
“As independent investors, business angels must put their own money – and indeed reputation – on the line each time they invest,” said Colin Mason, Professor of Entrepreneurship at Adam Smith Business School.
“So it should come as no surprise they’re prudent when it comes to interviewing entrepreneurs and rigorously examining cash flow”.
“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,” said University of Edinburgh Business School Chair in Entrepreneurship and Innovation, Professor Richard Harrison.
“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.”