8 Oct 2021
An angel investor is a wealthy individual who invests their own money in a small business for a minority stake, usually between 10% and 25%. Angels provide much more than just funding. As their name suggests, they are guardians who offer mentoring, time, skills, contacts, networking; and act as ambassadors for your business.
It’s vital to build a strong relationship with your angel, as they will typically spend lots of time working closely with you to help you grow your business.
Angels can invest alone, but usually they invest together as a syndicate, which helps them diversify risk. In a syndicate, a lead angel coordinates the deal and has the most contact with your business.
There is no cost to the finance, such as interest. Instead, angel investors seek to share in your growth through their shareholding.
Such investments are risky, so angels are selective, looking for small businesses that have the potential to scale and exit. However, they generally do not expect a return or exit for between three and 10 years.
Individual angels tend to invest between £5,000 and £500,000 in a venture, depending on your business and growth needs. But this can be higher, depending on the opportunity. Syndicates can invest over £1 million collectively.
To protect you and the investor, angels have a regulatory requirement to self-certify as high-net-worth or sophisticated investors.
Angel investment differs from venture capital (VC) finance, which invests in businesses through managed funds with private or public money. The VC manager invests on behalf of the fund and aims to make a return for its investors.
Due to high administration costs and the need for sufficient returns, VC funds make fewer investments in start-ups and early-stage companies, as these tend to be riskier. Angels are therefore increasingly important sources of finance for young companies.
Unlike a managed fund, angels generally conduct their own due diligence; meet you directly; sign legal investment documents; and make investment decisions. They also follow and support you more actively than a VC. Plus they tend to be less concerned with rapid return and exit, and more ready to support the business through a longer growth journey.
In addition to the capital itself, angels offer expert mentoring, with strategic, financial and sector-related advice to help you achieve growth. You can benefit from their time, expertise and business network, and they will be an ambassador for your firm. They can even become a non-executive director.
As angels typically take only a 10% to 25% share of your business, this leaves you firmly in control.
Angel investment can also give your business credibility for later investment rounds — for example, from venture capitalists.
A potential benefit for your business and your angel investors is access to generous tax relief schemes such as the enterprise investment scheme (EIS), seed EIS, and social investment tax relief (SITR).
The biggest potential disadvantage is that you give away a percentage of your company, plus lots of time and effort, with no guarantee that your business will grow through the investment and the angel’s involvement.
This is a significant risk. According to the UK Business Angels Association, 58% of angel deals may not return the original stake money and most investment returns come from only 10% to 20% of angels’ portfolios.
To maximise chances of success, follow the preparation and pitching tips below.
Angel investors are most suited to start-ups and early-stage companies with annual turnover below £5 million. You need not be making revenue or profit yet, providing the potential is there.
Angels are suitable for all regions and sectors - the key is that you have a scalable business proposition.
Angels generally provide finance for working capital, product development, entry into new markets, building teams, and supporting increased sales. It can take two to six months to receive the finance.
As discussed, you must be willing to hand over shares and work closely with your angel for between three and 10 years.
To look for an angel, ask your professional network, go to pitch events, search angel directories, and speak to firms that have worked with angels.
Understand what you want the angel’s role to be, post-deal. Think about what skills are missing in your team and where angels can add value. This can form part of the investment proposal.
In addition to the business potential, angels will be looking for business owners and managers with the right skills, experience, ambition, time and energy — so make sure there is a good fit.
Few businesses pitch to one angel and get an immediate yes. You'll speak to several angels with different questions, so preparation is key.
Make sure your products or services are disrupting or filling a significant gap in the market. Have a clear, unique selling point, market advantage, and or intellectual property.
Can you defend your market position; show existing sales and profits as a sign of potential; and explain future scalability and growth? What is the market size and realistic potential market share? Do these factors justify your valuation and provide value for money?
Angels will also look for a desire and strategy for exit, rather than a lifestyle business with no exit potential.
Make sure you understand your finances, including turnover, profit, sales growth and their forecasts. Know exactly how much finance you need, why, specifically how you will use it, and what impact it will have. ‘We'll grow faster’, isn't enough.
Angels invest in you as much as your business. So, in the pitch, do not simply recite facts and figures — try to connect, show your personality and tell an exciting story.
Be open, clear and detailed about your needs and ambitions. Be passionate and show your commitment to your business. Finally, angels will want proof, so be ready to evidence all these factors.