Are angel syndicates the best route for start-up investment in Scotland?

New data from LINC Scotland, the national association for business angels in Scotland, confirms what many with an eye on angel investment expected: 2021 was a record year.

The previous annual record of angel-led investment in Scotland was set in 2019 with £86m invested. And although investment slowed during the first waves of the pandemic in 2020, investment raised by angels and co-investors reached £146m in 2021, marking a 70 per cent increase on the previous record and nearly doubling what was raised in 2020.

Angel investors and syndicates bring a promising wealth of capital and expertise to those starting up and growing their businesses. But what should businesses bear in mind when considering approaching an angel investor?

Open to riskier deals

The first clear benefit to businesses seeking investment is that angel syndicates might be more likely to invest in riskier deals. For example, tech and life sciences companies that are innovating during their growth phase can be appealing to angel investors instead of more traditional investments. Investing in unchartered territory, while risky, can offer much greater and faster rewards, and the nature of an angel syndicate set up means that they can balance their successes and failures.

Angels’ willingness to invest can be a tempting prospect for businesses, but this money will come with conditions. For example, businesses should expect some degree of input and control from an angel. There may be certain things that a company will not be able to do without the investors’ consent – such as incurring annual capital expenditure over a certain amount or changing their business plan – as angels will want to make sure that the money is being spent appropriately and in accordance with the business plan that convinced the angels to invest in the place.

An angel at your table

Investors will often also want to appoint someone to the board. While that person’s responsibility as a board member will be to act in the interests of the company, having a voice for the investors on the board means that businesses may lose some level of autonomy. However, it can also provide significant advantages.

One such advantage is the expertise available: angel investors are typically already successful in their field. The more involved the angel investor is, the more a business can tap into their knowledge and network. To reap the rewards of this, businesses should research potential funders so that they can seek out those whose wider expertise and contacts are most likely to benefit the company.

It is also worth researching the controls and warranties that angel syndicates will require to convince the investors that the business is as safe a bet as possible. Businesses should be prepared for a labour-intensive start to their relationship as they prove certain basic legal requirements, such as demonstrating that they own their IP and are not currently in dispute with a third party.

Easier follow-on rounds

While the start of the relationship with angel investors can take time, once set up, it is easier for companies to tap into second rounds of funding. An angel syndicate is more likely to help businesses evolve by nurturing with further rounds of funding, especially if the business has performed largely in accordance with, or even outperformed, the original business plan. This is unlike bank funding, where the whole application for funding will generally have to be started from scratch each time.

To obtain bank funding, there will also be a long list of instructions to adhere to. Documents are likely to be more one-sided and largely non-negotiable and the sanctions for not meeting conditions are likely to be more severe. Yet, with angel investors, there is more give and take when it comes to finalising the terms and conditions, resulting in a more flexible arrangement. That is because angels are risking their own money, but banks are ultimately answerable to their institutional shareholders.

There are pros and cons to choosing to partner with angel syndicates, but if a company is a good fit, and can navigate them well, angel investors can provide long-term benefits to start-ups and growing companies.

Putting together a business plan to act as a “sales pitch” to investors is a great tool for businesses. It encourages start-ups to think long-term as to where they see their company going and how much investment is needed to get them there.

At a time of uncertainty when many businesses and sectors are struggling, it is encouraging to see the renewed appetite of angel investor activity in Scotland to identify opportunities and invest in the most innovative and promising companies, with the necessary capital to fund their growth.

Last year was a bumper year for anybody looking for an angel investor in Scotland and hopefully this trend continues into 2022 and beyond.

Stephen Clark is a senior associate in the corporate division of Edinburgh-based law firm Morton Fraser