What is an angel investor?

An angel investor makes use of their personal disposable finance to invest in small businesses that they have identified as having growth potential. An angel investor would normally take shares in the business in return for providing equity finance.

Angels use their knowledge skills and insights to make their own decision, rather than leaving the decision to an external adviser. They may take their decision through face to face contact or may identify deals through an online platform.

A key aspect of being an angel investor is the capacity to bring not only finance to help the business grow, but also to draw on your own experience, contacts and links to help the company achieve success post investment. You may be an active investor, or may act passively, often as part of a group of investors and where generally an investor is identified to take the lead in following the deal.

Where do I find an angel investor?

The best way to approach an angel investor is often through a warm introduction – one from a friend, contact, company or entrepreneur. Investors get a lot of inbound pitches, so it’s hard to qualify what’s a cold lead or not.

The UK Business Angels Association also often host events and investor forums bringing together investors, entrepreneurs and business leaders to encourage networking, connections and future investment.

We are hosting a series of events across the country, starting with Connected Investing Manchester and followed by events in Bristol, Newcastle and Cardiff.

At UKBAA we have implemented regional angel hubs that are essential in making the investing landscape accessible to all. There is a lack of infrastructure which means that neither angels nor entrepreneurs are visible to each other. The presence of funds is not enough as you have to create an environment where entrepreneurs are investment ready.

The hubs provide an opportunity to see some of the innovative and creative local businesses, who will have an opportunity to pitch to the angels. These hubs reflect the fact that I believe that to tackle the root of the problem, we need to increase diversity at an entrepreneurial level. If we increase diversity at this level, in the future we would hope to see a rise in the diversity of angel investors who want to share their professional expertise with others.

What do angel investors want to know?

We want to know the challenge that you’re addressing in the market or society, whether you have done your market research to show why your project meets a real need and can bring something new or disruptive to the market.

We also want to know how you plan to make money and that your business model can be scaled. We will ask if you have tested it out on any potential customers – not necessarily having sold anything, but you have to prove interest and whether you have checked out your competitors.

Related: How to pitch to a venture capitalist – a Growth Business guide

International scalability is growing ever more important, so to be able to think about how you would like your business to fit on an international stage is always a huge bonus.

How much can a UK angel investor invest?

Whilst business angels can invest on their own, more frequently angels invest alongside other angel investors through syndication. This enables you to pool your funds and share the risks, as well as share the due diligence and experience of other investors. The average individual angel investment is around £25,000 with syndicates providing – on average – around £190,000.

How much an angel investor invests depends on the individual needs of both the business and the investor. Larger SMEs expanding internationally may require more funding than a small business looking to grow nationally. This is one of the ways in which angel investors can tailor their support in ways that may be unavailable from traditional bank lenders. It also benefits the investor with an increased flexibility to the amount invested, especially as part of a syndicate.

How long do angel investors stay on as investors?

Angel investing is generally regarded as “patient capital” and you may not see an exit or a return for up to 8-10 years. Entrepreneurs often rely on the guidance of people who have experience in running and building a business. This guidance is of just as much importance as investment and funding.

How long angels remain part of the business again varies on a case by case basis depending on the amount of guidance needed in the life of the business. It is often beneficial to the business to retain the expertise and experience of angels, and what is good for the business is by extension good for the investors themselves.

How do angel investors make a profit?

Angel investors seek to share in the successful growth and have a return on their investment when the business successfully exits.

There are five main routes of achieving an exit for angel investors and the amount of profit or return on investment ultimately depends on the growth of the business.

• Trade sale – The sale of the entire issued share capital to a third party as a trade sale – this is the most common exit, although occasionally by way of a “buy-out”, where the investee company is acquired by an entity funded by a private equity investor, a bank and/or a management team.
• MBO – The buy-back of the angel’s shares by the company itself from its own resources, or by the entrepreneur. This is relatively unusual as an exit for angel investors.
• Purchase of shares – Purchase of angel investors shares by a VC, VCT, PE or Corporate VC investor. The entry of a more significant investor party can enable the original angel investors to gain a partial or full exit.
• Secondary Markets – Some financial organisations are offering secondary markets to enable angel investors to exchange their shares for financial liquidity. This is new area and further secondary markets may develop including sector-specific opportunities.
• IPO – You may also identify the opportunity to take the business to the next level of growth and raise more significant levels of risk capital by launching the business onto the public markets through AIM or IPO. This is not usually a direct exit for the angel investors but can enable some liquidity at the time of public market entry when other investors come on board.