How Angel Investors Work
Angel investors bring more than just funding to your start-up. They often also offer additional support, like a professional network to tap into and business expertise, that could be crucial to getting your business off the ground.
There are many different reasons why businesses may seek funding.
Whether they’re looking to expand, clearing debts, boosting their cash flow, investing in new equipment or taking advantage of specific opportunities, the question of finance and how to get it is rarely far away for small and medium-sized businesses.
A loan from a bank or a building society will often be the starting point. But there are other options worth considering too, especially for relatively new businesses. These include turning to angel investors.
What is an angel investor?
Angel investors are typically wealthy individuals who want to generate decent investment returns by helping out small, private, enterprises.
They can either invest on their own, as part of a group called an ‘angels syndicate’ or through equity crowdfunding platforms, where their money is deployed along with that of other investors.
They are sometimes referred to as seed investors, as they tend to favour start-up businesses needing an injection of capital to get off the ground.
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How could an angel investor support your business?
The main form of support that angel investors offer is a sum of money in return for a stake in the business that they hope to be able to sell at a profit later on.
According to a report by the British Business Bank, in 2020 the average initial angel investment in the UK was £69,000, down from £100,000 due to the effects of the pandemic and the related economic uncertainty. The typical follow-on investment (where angel investors add further funding having been satisfied with the outcome of the initial injection) was £46,000, down from £70,000 in 2019.
It’s not just about money though. Angel investors will often be individuals with experience in supporting, leading or building up businesses, so they can also bring value through their experience, knowledge and the potential contacts they can access.
What questions might an angel investor ask?
Angel investors usually invest in early-stage businesses where there is a high risk of not getting their money back. They will therefore want to establish a firm understanding of your business model, your aspirations, how you intend to build the business, the market research you’ve carried out and your own commitment to the journey.
They will also want to interrogate your financial situation, which will likely involve exploring your cash flow, your projections for the coming business years, the cost of customer acquisition and how the proceeds of the fundraising will be used, among other factors.
How can I find an angel investor?
Once you’ve set out exactly what you need from an investor and the issues they can help you with, there are several ways to start searching.
There are numerous online platforms that can help you find an angel investor, including LinkedIn, angel investor communities such as Angel List and the various equity crowdfunding platforms available. The UK Crowdfunding Association has a list of its members on its website.
You can also look for established angel investor networks that match UK businesses with potential investors.
It might be worth checking out the angel investing networking events that aim to connect entrepreneurs with potential investors.
What are the pros and cons of angel investors?
As with any form of business funding, there are advantages and disadvantages to consider.
The advantages include the greater risk that angel investors are sometimes prepared to take (relative to, say, banks) in pursuit of returns; the knowledge and experience they offer; the networks they can provide access to; and the fact that you don’t have a loan to repay (instead they will take a stake in your business).
There are flipsides to each of those points, however. For example, as well as taking a stake they may also want a say in the business and how their funding is used, potentially reducing your control over the operation.
That stake could also end up being worth a lot more than a loan that you would have repaid, while there may be a lot of pressure to produce the returns the investors want. It’s also the case that angel investors will rarely provide more than £150,000, which for many small businesses could be much less than they need.
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What other funding options could I consider?
Angel investors can be used in addition to other types of funding, not just instead of them. Alternative sources range from bank and building society loans (both short and long term), government grants, rolling credit facilities, asset financing and venture capital funding.
Each has different criteria and a range of pros and cons.
» MORE: Funding options for expanding your business
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Jeff is a freelance journalist who writes across finance & business. He was the personal finance editor at The Scotsman & Scotland on Sunday & a member of the Financial Services Consumer Panel. Read more