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Table of Contents
- Angel investor meaning
- How angel investing works
- How do angel investors make money?
- Angel investors vs venture capitalists
- What questions might an angel investor ask?
- How is angel investment regulated?
- How to find an angel investor
- Advantages and disadvantages of angel investors
- What other funding options could I consider?
Whether you are looking to expand, clear debts, boost your cash flow, invest in new equipment or take 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.
Below we dig into what an angel investor is, how they work, and what to be aware of before considering them for funding.
Angel investor meaning
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.
How angel investing works
The main form of support that angel investors offer is a sum of money in return for a stake in the business. This could either be through your business immediately offering them ownership equity, or convertible debt that will later become stock.
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.
This isn’t guaranteed, however. Some angel investors may choose to remain ‘silent’, leaving you to run your business without assistance, and free to sell up when they see fit. Collaborating with an angel investor is different to finding a new business partner, who will likely be more invested in the long-term performance of your business.
How do angel investors make money?
It is a good idea to understand how angel investors make money before deciding whether they are the right fit for your business.
Although they may also offer mentoring and support, angel investors are still looking to make a return on their initial investment by eventually selling their stake in your business at a profit.
Depending on the disposition of the angel investor in question, and their relationship with your business, this could put pressure on you to produce returns. Whether or not you would feel comfortable with such pressures should be taken into consideration before seeking angel investment.
» MORE: How to invest as a business
Angel investors vs venture capitalists
While both angel investors and venture capitalists invest money into businesses in exchange for equity, there are significant differences to be aware of.
| Angel investing | Venture capital | |
|---|---|---|
| Who is investing? | An individual investor, though sometimes a group of individuals called an ‘angel syndicate’ | Usually an entire firm, including private investors and board members |
| How much is being invested? | Normally offer ‘seed funding’, between £15,000 and £500,000 | Significant, multi-million-pound investment |
| Who is being invested in? | Typically early-stage businesses, such as start-ups | More established businesses with a longer trading history, though start-ups with strong long-term potential may be able to access venture capital |
| How are they motivated? | By profit, but also potentially because they find aiding early-stage businesses rewarding; they want to give back; or they want to support causes they are passionate about | Purely by profit, and the return on the initial investment |
| How will they be involved? | Can provide expertise and assistance. How personally involved they are with your business will depend on the terms of your arrangement, and the individuals themselves | Will often want a controlling stake, such as a seat on the board of directors, and typically play an active role in how your business is run |
What questions might an angel investor ask?
Angel investors usually invest in early-stage businesses where there is a risk of not getting their money back. They will want to establish a firm understanding of your business model, your aspirations, how you intend to build the business, the market research you have carried out and your own commitment to the journey.
They will also want to review 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.
In this sense, although angel investing differs from traditional financing options such as business loans, you will still need a similar level of preparedness when approaching both types of funding.
How is angel investment regulated?
There are a few ways in which angel investments are regulated in order to help protect you and your business.
Financial Services and Markets Act 2000 (FSMA)
The Financial Services and Markets Act 2000 states that angel investors must ‘self-certify’ as a ‘sophisticated investor’ or ‘high net worth individual’.
As set out by the UK Business Angels Association (UKBAA), you are classed as a high net worth individual if you have:
- an annual income of £100,000 or higher
- net assets worth £250,000 or more, excluding your pension fund assets and your private residence
The UKBAA classes you as a sophisticated investor if you have:
- been the director of a company with a turnover of at least £1 million within the last two years
- made more than one investment in an unlisted company in the last two years
- belonged to a business angels network or syndicate for at least six months
- worked in private equity, or finance for small and medium enterprises (SMEs) in the past two years
These rules are in place to try and ensure that only legitimate individuals can provide angel investment, with the aim of protecting businesses from unscrupulous or financially irresponsible figures.
Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS)
These government schemes provide tax relief to individual investors looking to buy new shares in companies, while limiting the stake to a maximum of 30% of the business. This means you can receive investment while still retaining control of your company.
How to find an angel investor
Once you have 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 several platforms, on a national and regional level, that can help you find angel investors. These include:
- UK Business Angels Association:has 650 members, more than 70 events a year, and invests around £2.3 billion a year.
- UK Angel Investment Network:has over 300,000 registered angel investors, and allows you to submit pitches to attract funding.
- Envestors:a network of more than 4,000 sophisticated investors that has raised more than £120 million for early-stage businesses.
- Minerva Business Angel Network: part of the University of Warwick Science Park, and based across the Midlands, London and the Northwest, this network has raised over £63 million for businesses.
- Equity Gap:invests in emerging businesses throughout Scotland.
- LinkedIn:while not a dedicated angel investment network, LinkedIn can be used to approach individual investors directly.
- Dragon’s Den:perhaps the most famous example of angel investing, the BBC show is an option if you are feeling bold (and are comfortable in front of the cameras!)
Advantages and disadvantages 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 may be prepared to take on in pursuit of returns, compared to a bank, for example
- their knowledge and experience
- networks they can provide access to
- 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. These include:
- As well as taking a stake, investors may also want a say in the business and how their funding is used, potentially reducing your control over the operation. Their stake could also end up being worth a lot more than a loan that you would have repaid.
- There may be a lot of pressure to produce the returns the investors want.
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 of business funding 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
Image source: Getty Images
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