Angel investing is early-stage equity investment from high-net-worth individuals. It is a form of equity funding that precedes venture capital and private equity.
It is the third biggest investor type into UK start-ups, after crowdfunding, venture capital & private equity, according to research group Beauhurst.
Around £2bn is invested into early-stage companies by angel investors through the SEIS and EIS schemes every year – both directly and via funds.
Angel investing benefits businesses that are pre-revenue or pre-profit, with annual turnover of under £5m. Angel investors are typically very experienced in a field or industry and will offer mentorship alongside their investment.
As well as investing as an individual, angels may invest together as part of a syndicate or part of a crowdfunding platform.
When investing as a syndicate, the group will have a lead angel to coordinate the deal and who will have most contact with the business going forward.
When would I need angel investment?
Angel investment is required when a business has established itself enough to demonstrate significant growth potential but requires the funds to do so.
The ideal time is when the business is on the verge of breaking new ground, such as launching a product or entering a new market.
The business may be pre-profit or pre-revenue, but investors will still want to see demonstrable market fit and growth potential with a minimum viable product (MVP). Ideally, the product will also be protected with IP.
How much can be invested into my business?
The amount is entirely dependent on the valuation of the business and the amount of equity the angel investor wishes to invest.
Typically, an angel investor will invest anywhere between £15,000 and £2m, according to the British Business Bank.
An angel investor cannot take more than 30 per cent of equity under the EIS and SEIS schemes. The UK Business Angels Association (UKBAA) warns that later stage investors may be put off investing if too much equity has been taken from the business over its short lifespan.
Businesses typically give up between 15 and 30 per cent of their business for investment.
How do I find an angel investor?
Many angel syndicate groups host pitch evenings. It is more than likely that you will need to speak to more than one syndicate before getting funding, so prepare answers to different questions.
You can also find angel networks through directories, such as via the UKBAA or by speaking to companies which have already gone through the process on any recommendations they have. You can find 20 angel investor networks you should know about, here.
You can also view a list of upcoming angel events via the UKBAA, here.
Top UK angel networks for your start-up – The UK is the biggest angel investor market in Europe, with the number of investments overtaking crowdfunding for the first time
How do I impress an angel investor?
They will want to see the both of you will get along, as this could well be entering an eight-year-plus business relationship.
There are multiple criteria angel investors typically look for before making an investment, though. These include:
- Clear plan to scalability with extensive market research behind you
- Ability to develop a lasting working relationship
- Command of the business finances and transparency – you will know exactly how much you need and why
- Clear alignment of expertise and network
- Proof of patents
- Availability on the EIS and/or EIS schemes so they can be given tax relief on their investment
- A good team with different expertise
- A purpose
How to get an angel investor onboard – Angel investors bring more than money – they offer experience, skills, wider contacts and industry knowledge. Here’s what they’re looking for
You’ll also want to prepare a winning pitch. Here’s how to find and pitch your business to an angel investor. Ensure this is clear, concise and realistic – think of those SMART goals.
Even if your pitch doesn’t amount to anything, events are a chance to listen to feedback to improve your proposition, so don’t get disheartened.
What should I look for in an angel investor?
You will want to source an angel investor who has expertise and a network in the industry relevant to your business and aims.
Most angels have a specific specialism, such as Angels in MedCity, which as the name suggests, specialise in med-tech including medical devices, digital health and diagnostics. Others, such as GC Angels, invest in specific regions – the northwest, in their case.
But it is also important to be aligned with the investor in your expectations for growth and what the plan for exit is.
A business’s relationship with an investor can also be a relatively long one, so you will also need to ensure you get on well with the individual, too.
Angel investing vs venture capital
Angel investors inject capital into a business at an earlier stage than a venture capital firm and therefore the amount of capital reflects this. There are other differences, however.
Angel investors are individuals and make investments based on their own judgement or interests. Venture capital is deployed via a fund, with multiple stakeholders looking to make a return within an agreed timeframe.
Because of this, angel investors are typically more patient with their capital, holding in for longer with a company before exiting.
Before deciding angel investing is the path you want to take your business down, it is worth exploring different sources of funding, such as government grants, equity finance and banks.
Pros and cons of angel investing
- Supplies a business with the funds needed to grow the business to its next phase
- The start-up can take full advantage of the angel investor’s network
- The investment can put a business on good stead for further equity funding later – like venture capital
- Results in some equity dilution for the founders – anything between 10 and 30 per cent
- Too much equity dilution can affect later funding rounds
More on angel investing
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