The success of Dragons’ Den has long thrust angel investors into the spotlight, but away from the heat and drama of the den, angel investment is a crucial component of the UK start-up ecosystem.
Despite a fall in deals in Q1 this year, angel investment is still the third biggest investment type in the UK and there are promising signs ahead, with a growing number of female angel investors contributing £2bn a year into start-ups.
The vital role of angel investing in growing the start-up ecosystem in the UK was equally recognised in Chancellor Rishi Sunak’s 2021 Autumn Budget with announcements of £150m in further funding for a regional angel investing programme.
Brooks Newmark’s 6 essential tips for aspiring angel investors
I became an angel investor five years ago, after working as an MP for ten years and in private equity for 15 as a senior partner at Apollo Global Management. During my time in parliament, I was one of the architects of the Seed Enterprise Investment Scheme (SEIS), recognising that there was a lack of real risk capital supporting start-ups in the UK. When I left parliament, I decided to focus on investing in and mentoring pre-revenue businesses primarily run by young entrepreneurs. I have invested in several start-up companies including Rezolve (a fintech start-up we are hoping to IPO this year), Eel Power (an alternative energy battery storage business), Nkoda (an online music publishing business), Spring (a mobile phone and electronic goods recycling and reselling business), Addition Finance (a low-cost accounting service for SMEs) and Get It Rwanda (a food wholesale and distribution business in Rwanda and my only non-UK angel investment). To date, my investments have helped create over £2bn in value from scratch and shown a 27-fold blended return on ten investments in five years.
6 questions you need to ask when investing in a start-up – Angel investor David Newns shares the 6 questions he asks himself when considering whether to invest in a start-up
Undoubtedly what lures people into becoming angel investors is the potential of great reward, but the reality is that an overwhelming majority of start-ups fail. The learning curve for angel investors has the potential to be costly and stressful, but it doesn’t have to be. Becoming an angel investor can be an incredibly rewarding experience and, over the years, I’ve enjoyed meeting the entrepreneurs behind potentially ground-breaking innovations. I certainly had my fair share of stumbles when I first began, but here are my essential lessons for aspiring investors.
#1 – Do your research and take a portfolio approach to your investments
As with any other financial endeavour, angel investing comes with a certain degree of risk. In my first investment as an angel investor, I lost 100% of my investment because I trusted the recommendation of a friend rather than doing my own thorough due diligence.
Aspiring investors need to think strategically and do their due diligence to preserve their capital. Don’t invest in someone who is a nice guy and seems smart. Invest in them because you understand the competitive landscape, the barriers to entry, the scalability of the investment and the ambition and dedication of the entrepreneurs to put in the time and make the sacrifices necessary to make their company a success.
Some investors focus on one sector. I don’t. I am sector agnostic. I back people and ideas. If you are a generalist, as I am, it makes sense to diversify your portfolio and ensure that your financial health isn’t dependent on the success of one or two ventures in the same sector. Alternatively, if you are an expert in one field of course it makes sense to leverage your own expertise as much as possible.
#2 – Target opportunities that are scalable
As an angel investor, you are likely to have more failures than successes. So, your successes need to be significant, in order to both provide financial reward and also compensate for those failures.
One of the first things I look at is the total addressable market (TAM) of a company. It’s a simple point, but an important one. A business can be successful in a narrow demographic but never have the ability to scale. Remember you can expend as much or more energy on business which has a narrow market opportunity as one that has a much larger market opportunity.
It’s also important not to forget to look at how much it’s going to cost you to scale. Cash is important for any start-up and the more successful you are the more cash you will need. Some businesses fail not because they are not great ideas, but simply because they suffer a working capital squeeze as they grow and run out of cash before they can raise more capital. Almost all my investments have faced this – where they’re often unable to meet payroll at the end of the month – but key to my strategy to backing people who I believe are on to something is to support them in these difficult times and provide the capital necessary to get through these cash flow challenges. In essence, I am there to support them over several rounds of funding over the first few years.
#3 – Don’t write off the ‘failed entrepreneur’
Over the course of my career, the motto I have lived by is ‘failure is only important if it’s the last time you try”. Unlike in the US where failure is a badge of honour, in the UK we are too quick to write off entrepreneurs who have failed in the past. The business establishment simply closes ranks and what we are left with are untapped ideas and unrealised commercial potential.
Research suggests the learning process of opening and closing a business increases the chances of success the second time around and my most successful investment right now actually comes from backing someone who had previously failed spectacularly. He had a great idea, but for non-business reasons, the business blew up and he found it impossible to find many other investors. It’s a tech business that we finally launched in the middle of the Covid pandemic in September 2020. The business has grown spectacularly since then and is an 80-fold (to date) return on my initial investment.
How to find and pitch your business to an angel investor – Jenny Tooth, CEO of the UK Business Angels Association, explains what angel investors look for if they are thinking of investing in your growth business.
#4 – Stick with your entrepreneur for multiple rounds
The mistake many angel investors make is to only be there for one or two rounds of investing. In my career as an angel investor, I’ve trusted my intuition and will back my entrepreneurs multiple times, as I discussed above. I believe in following on where companies are being successful if the capital is available to do so.
Many angel investors spread money around in the hope that one or two of their investments work out, but having a narrower focus and championing those that are on their way to success can reap great rewards. I make only two or three investments a year and take between 10% and 20% of the business, thereby aligning my interests as much as possible with the entrepreneur. It’s not about making a quick buck and it’s important that through regular communication you back your entrepreneurs through thick and thin (key advice for any entrepreneur – always keep your investors in the loop). This feeds into my next point.
#5 – Be a trusted adviser
Business angel investing at its best is about using your experience to help those businesses reach their full potential by playing a vital role in sharing expertise, advice and contacts. You are more than just capital, or you should want to be. Know where you can add value and do so. This will also increase your reputation as a good angel and more opportunities will come to you.
Communication is key if this is to work, and I make sure I am available around the clock for the entrepreneurs I back. It is important to challenge your entrepreneurs, whilst also supporting them to achieve their ambitions.
#6 – Look for what makes your opportunity unique
This is a crucial one – look for opportunities that are unique. The investment might have a ground-breaking piece of tech or be positioned to overcome the high barriers to entry. Or perhaps simply, it presents an opportunity where you have a first-mover advantage and it’s a race to success where you are first out of the blocks.
Rather than the business, what makes the investment unique could be the founder themselves. Finding a great founder and founding team with a distinct backstory and vision can make the difference between success and failure for early-stage companies.
Brooks Newmark is an angel investor focusing on early-stage tech start-ups, a former MP, philanthropist, academic and campaigner