Frugal entrepreneurs need to back their own business or be ignored by angels

A new study has suggested that business owners need to "put their money where their mouth is" to convince angel investors they're a risk worth taking

UK entrepreneurs need to back their own business and put “their money where their mouth is” or risk being ignored by angel investors, according to a new study.

The research, conducted by the University of Edinburgh Business School and the University of Glasgow’s Adam Smith Business School, has revealed that 87% of investors would deem a business “too risky” an investment opportunity if the entrepreneur had not made “a significant financial investment in their own venture.”

The study, which quizzed over 100 UK angels on their investment habits, shows that 70% of respondents thought founders motivated by status were more risky, while 62% said business owners looking to become wealthy were a safe bet.

97% of those surveyed believed founders with “demonstrable leadership skills” reduced investment risk, followed by familiarity with the market (96%) and energy to make a sustained effort (94%).

When it comes to carrying out due diligence on an investment opportunity, old adages – back the entrepreneur not the idea and run the numbers – ring true. 90% of business angels said interviewing founders was important, while 87% felt cash flow to be key.

Significantly, just 52% said detailed product information was vital in deciding whether to finance a venture with just 36% believing having independent due diligence carried out by a third party accounting or consulting firm was important.

Professor Richard Harrison, business school chair in entrepreneurship and innovation at the University of Edinburgh, led the study with Colin Mason, professor of entrepreneurship at Adam Smith Business School.

Mason said: “As independent investors, business angels must put their own money – and indeed reputation – on the line each time they invest. So it should come as no surprise they’re prudent when it comes to interviewing entrepreneurs and rigorously examining cash flow”.

Harrison said: “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.

“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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