Raising investment is vital for startups to get off the ground and, though necessary, can be a tricky process for the uninitiated. Angel investors, high-net worth individuals making personal investments, are likely to play an important role in supporting early-stage businesses in their first rounds of fundraising.
These investors will typically invest anywhere between £5000 and £150,000 in a single venture – depending on the business and growth needs – and it is these types of investments that will take a business from the idea stage and turn it into something more tangible.
An introduction to angel investing
Let’s start by outlining what angel investing is – essentially an individual choosing to make use of their personal disposable finance to invest directly into private companies. Whilst many angels are part of formal syndicated angel groups and business angel networks, there is also a sizeable portion of angel investing happening under the radar in the UK, whether that’s a group of friends or even business colleagues collaborating in individual deals. A key advantage to having an angel invest in your business is that they will often include their skill-set as part of the deal, adding value that you wouldn’t necessarily get with other types of investment.
The UK Business Angels Association estimates that there are around 18,000 business angels active in the UK, privately investing an average of £850m each year (2.5x the amount invested by venture capital investors in a typical year) in startups and early-stage businesses. These 18,000 are generally affluent and wealthy individuals who may well have recently exited their own companies or have successful careers under their belts, with a wide array of business skills or contacts to offer.
As an entrepreneur looking for angel investment, time should be taken to think about what a business angel is likely to be looking for in an investment opportunity. For example, when raising money for a more established business, you will be approaching VCs and banks, where the key concerns will be on the potential rate of return on their investment.
Angel investors, on the other hand, don’t necessarily have the same modus operandi. I have outlined above that the typical angel investor is someone who has had success in their own careers and wants to give something back to the community. As such you might not be surprised to hear that altruism and enjoyment play an important role in the decision-making process.
What sorts of businesses do angels look to invest in?
A business angel will often invest in something that they have an interest or a background in, and as such the satisfaction of the challenge plays an important part in the value an angel is to gain from investing in your business. When seeking angel investment, do think about the background or known interests of the investor – those whose background or interests marry well with the investment proposition are far more likely to invest, and are better placed to add value. Often it is an emotive appeal – the ability to mentor and add hands-on support – that is the attraction to making the investment.
Another key element which will help attract a potential investor will be the team. In an early stage business the quality of the team is crucial, and may even be a bigger draw for investors than the financials or five year plans. As a founder, your ability to attract A-grade staff has a considerable impact on your ability to attract investment, so do remember to focus efforts on talent acquisition.
Read more about angel investing:
- Number of UK female business angels on the rise
- Government funding pot makes 50th investment
- Thierry Henry, Cesc Fabregas and Robin van Persie take to angel investing
How to raise angel investment
Once initial avenues have been exhausted, and more capital is required to push the business to the next level, you are probably ready for a seed round and to begin approaching business angels. Networking through industry events and awards are sure-fire ways to start opening doors.
Be sure to research the tax incentives available for those – both friends and family, and angel investors – who are looking to back your business initially. The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Schemes (SEIS) are important ways of de-risking investment and are great tools available to entrepreneurs looking to fundraise.
Upon securing the support of a business angel a wise move may be to encourage the investor to approach angel syndicate groups. The old adage “strength in numbers” is one that definitely applies to businesses in the early stages. There are benefits to getting a number of business investors involved: more investors can come together to raise a larger investment round and then the business has greater resources at its disposal, not just at this round but also in inevitable future rounds. More heads also means more thorough due diligence can be undertaken, while the greater the wealth of business angels then the greater the wealth of business skills and contacts that will be available to push the business forward.
When considering who to invite into an investment syndicate, entrepreneurs should think about the future of the company – many businesses will need further funding rounds and so this is likely to be a long term relationship. It is important that you can work closely with these investors, so be honest and transparent about your business plans and needs. Another option business angels may benefit from is approaching the Angel CoFund. At the Angel CoFund we co-invest alongside business angel syndicate groups, adding to funding rounds and, as such, extending the runway of their investment.
Keeping your investors happy
Building a high-growth business can prove to be challenging at the early stages of development, but an angel investor can help smooth the path, both financially and in terms of a business development.
It’s essential not to forget your investors once you have the cash. If you ensure they enjoy being involved in actively building your business, they are far more likely to become real advocates for your brand. This will help with the next round of funding and will empower them to make introductions to their network.
But it all starts with networking, so get out there and start talking to people about your idea, and see how seed investment can help you grow your venture.