Understanding Angel Investment
Financing your startup can be challenging and time-consuming, particularly as a new business with no trading history.
Business angels can be a good way to raise finance. Still, you’ll need a convincing proposal and plenty of determination to secure a deal that works for you and the investors.
Business angels are a source of equity finance, which means that they invest their own money into your company in return for a share of its ownership. Angel investment is not available if you operate as a sole trader or partnership.
In this guide, we explore what business angels look for in a potential investment. We’ll also provide tips on how you can approach them to boost your chances of success.
Who are business angels?
Business angels are individuals with a high net worth, or groups of investors, looking for opportunities to invest their money.
Securing investment from business angels is one way of injecting capital into your enterprise if you can’t raise it yourself or via conventional loans.
Typically, business angels may have owned a successful business in the past. They will often support your business during the start-up or growth phase. You might also be able to tap into their commercial experience and network of contacts.
How much do business angels invest?
Business angels will usually invest between £10,000 and £500,000 in a business, but investments of more than £2 million by angel syndicates are becoming more common. The amount of equity that angels receive in return for their investment varies widely. It’s typically between around 10% and 25% but may be as much as 40% or more.
Since angels invest in return for a stake in the business, you won’t need to make loan repayments to a bank or other financial institution.
What do business angels look for when investing?
Essentially, business angels want to receive a good return on their investment.
Angel investment is most suitable if your business has growth potential, and you are willing to give up part ownership in return for investment.
Business angels’ backgrounds, experiences and interests may differ. Still, they’ll all be looking for returns, benefits and involvement as follows.
Return on their investment
By taking an equity stake in your business, angel investors will be looking for a healthy return. The exact rate of return that they expect will depend very much on the angel in question, the nature of the industry and the initial size of your business.
In typical cases, an angel investor is likely to expect around 30-40% annual return on investment over three to ten years.
Business angels often require some involvement in running your business if they choose to invest. This isn’t because they distrust your abilities. It’s because business angels can provide additional specialised experience and commercial insight that may be missing from your business as it stands.
How can you find a business angel?
There are several different ways to go about finding an angel:
- Various networks link up business owners seeking investment with suitable angels. The UK Business Angels Association (UKBAA) has a directory of business angel organisations that can help match your business with an angel.
- There are both local and national networking events where you can meet potential angel investors.
- Ask your business adviser, bank, solicitor or accountant if they have any contacts who might be interested in investing.
Before deciding whether to use a particular business angel, it’s essential to check that they have self-certified as either a ‘high net worth individual’ or a ‘sophisticated investor’.
For more information about self-certification, go to www.ukbaa.org.uk/services-for-investors/certification-and-accreditation/self-certification.
Thorough preparation is essential before approaching an investor. Along with your business plan, you should have key documents available for the investor, such as:
- Profit and loss accounts.
- Balance sheet and cash flow forecast.
- Any existing shareholder agreement.
The first meeting will be crucial as the angel will be evaluating not only your business, but also how you present yourself and react to feedback.
You and the rest of your management team should show that:
- You are clear thinkers and organised.
- Your business is sustainable and can achieve significant growth.
- You have a plan to achieve growth and success.
- You will sell shares to an outsider and give up a degree of control over your business.
Business angels will need to know not only how much money you are seeking, but also how you are planning to use it.
Hints and tips
- Having a business plan is essential not just for the business angel, but for you and the rest of the management team.
- It’s a good idea to seek professional advice from a business adviser, lawyer or accountant.
- Carry out due diligence on your potential investor. Ask about their previous track record as a business angel and their expertise. This will help you decide if they are a good fit.
- It’s essential to consider what will happen at the end of the investment period. Who will purchase the investor’s stake if they decide to sell it? What will happen if things go wrong and the value of their investment falls?
DISCLAIMER While all reasonable efforts have been made, the publisher makes no warranties that this information is accurate and up-to-date and will not be responsible for any errors or omissions in the information nor any consequences of any errors or omissions. Professional advice should be sought where appropriate.