Angel investment as business funding can provide first-time equity fundraisers with significant early stage investment support, and guidance from experienced entrepreneurs. As a recent article in the Financial Times shows equity investment in small business at a record level, this article provides further guidance as to your options in this regard.
If you are looking for financial input and guidance from experienced individual investors, angel finance could be for you. Angels are usually wealthy entrepreneurs, and dealing with them is less formal than with other forms of equity finance. But they are individual personalities so are also less predictable.
As well as investing money, they can offer skills, contacts and experience, and some will fill gaps in your management team, either by offering advice or filling specific roles. Angels tend to offer smaller sums at an earlier stage than venture capitalists (VCs). This may help take the business to the point at which it is attractive to a VC firm. The most reliable way to source angels is to contact one of the many business angel networks, which sift opportunities for their pool of investors and arrange networking events for you to present your business.
Common Questions on Angel Investment as Business Funding
What will angels back?
Angels invest in almost all industry sectors, but often prefer sectors in which they have previous experience. New, early and expansion-stage companies are generally favoured, but they will consider all businesses requiring finance.
What can it be used for?
It is often used to help businesses accelerate away from the start-up phase, and mature businesses sometimes use it to launch new products and services, open new premises, buy competitors or to take on staff as growth demands it.
How much can be raised?
The amounts involved in angel funding vary widely, from £10,000 up to multi-million pound sums. Most angels invest £20,000 to £50,000 per deal and when syndicates are formed, sums can be even larger.
How does the investment work?
Investment can be upfront as a lump sum or may come in stages dependent on your business hitting specific milestones, such as achieving sales or launching an important new product or service.
Where can I find business angels?
Angel Investment as Business Funding as an option can come through personal contacts as well as industry contacts or suppliers. But as mentioned earlier, the most structured way is to approach a regional business angel network close to your business – these each represent a grouping of private individuals looking for investment opportunities. They often operate in different ways – some are more active or more structured than others so look at their client portfolio first, which is often held online.
Are there barriers to raising funds?
Angels are widespread and can be difficult to locate. You may spend months finding investors who are interested. When you do track down a possible backer, the process of persuading them to invest can sometimes also be protracted – but persistence can pay.
“Because angels are individuals, they are unpredictable,” says Chris Niehaus, corporate finance partner at the Caban Capital corporate finance firm. “Their priorities can change and things can happen in their personal lives which you can’t bargain for. With a VC there is a more rigorous process you can see and understand.”
What are the costs?
Angel finance will involve costs and charges ranging up to around 10 per cent of funds raised and you should find out about these at the outset. Costs are lower than venture capital and public market listings It is, however, a full-time activity for one person in your company, often the owner-manager, so the cost of time taken out of running the business should be calculated. And because it often involves early-stage companies and is consequently considered a high risk, investors may expect to take a large share in your business in return for their financial input.
■ An independent angel network will charge presentation fees of hundreds of pounds to present your business at one of their events
■ If successful the fee can be as much as 3-5 per cent of the sum raised. Some networks may want an interest in the business on top, or in place of some, of the fees listed above
You should ensure you understand the fees charged and what you can expect to receive for them at the outset of the process.
Specialist advisers in this case are not always necessary. You could use your accountant, lawyer or business adviser if they have relevant deal making experience.
How likely is a successful fundraising?
More than 90 per cent of companies seeking angel funding are turned down in the early stages, according to research by NBAN. Having a strong business plan is essential You will also have to be able to demonstrate how your business will use any funds it raises to achieve specific growth objectives.
Angels may wish to visit your business to satisfy themselves that their investment is going to be a success, and to work out their role in the company. Where you are dealing with a syndicate, the potential complications increase, as the various investors often have different concerns.
How quickly can I raise it?
Angels often undertake their own due diligence and the investment has a lot to do with personal feeling. Due to its somewhat informal nature (compared to the more standardised process used to secure venture capital), the angel investment process can take an unpredictable amount of time, although three to six months is typical.
What do angel investors expect?
Given the strong element of risk involved in many angel investments, investors tend to seek high rewards.
■ Most will seek an exit in three to five years
■ They will expect growth of their capital of at least 25 per cent a year, often higher
■ Your management team may need to show equal commitment to the project,
and be prepared to back the venture with their own money as well
■ Market validation of your business through existing sales or known distributors is desirable, although it is not essential
■ Some businesses may find the close scrutiny constricting: many angels are seeking the thrill of being involved with a dynamic early-stage business, not just financial rewards, so will expect to contribute to the direction of the business.
Exploring the key characteristics and criteria that attract angel investors.
Innovative Startups:
Angel investors are particularly drawn to businesses that bring fresh and innovative ideas to the market. Startups with groundbreaking products, services, or technologies tend to capture the attention of angel investors who seek opportunities for high returns through innovation-driven ventures.
Scalability Potential:
Businesses with the potential for rapid growth and scalability are attractive to angel investors. Angels are motivated by the prospect of significant returns on their investment, and scalable businesses offer the promise of expanding market share and profitability over a relatively short period.
Strong Management Team:
Angel investors not only invest in ideas but also in the people behind them. Businesses with a capable and experienced management team are more likely to secure angel funding. Investors look for leaders who demonstrate a clear vision, industry expertise, and the ability to navigate the challenges of growing a successful business.
Clear and Viable Business Model:
Angel investors seek businesses with well-defined and viable business models. A clear understanding of how the company generates revenue, acquires customers, and sustains profitability is crucial. A well-thought-out business model provides confidence to investors regarding the company’s potential for financial success.
Market Potential and Traction:
Businesses operating in markets with significant growth potential are appealing to angel investors. Additionally, demonstrating traction in the form of customer acquisition, revenue growth, or market share gains enhances a business’s eligibility for angel funding. Investors want to see evidence that there is a demand for the product or service.
Exit Strategy:
Angel investors invest with the expectation of a profitable exit. Businesses that present a clear and viable exit strategy, such as through acquisition or initial public offering (IPO), are more likely to attract angel investment. A well-defined exit plan provides assurance to investors regarding the potential for realizing returns on their investment.
Effective Communication and Relationship Building:
The ability of entrepreneurs to effectively communicate their vision, strategy, and progress is crucial. Businesses that can build strong relationships with potential angel investors, conveying transparency and trust, are more likely to secure funding. Establishing a rapport with investors is as important as presenting a sound business proposition.
In conclusion, businesses that qualify for angel investment as a source of funding share common characteristics that appeal to angel investors. Innovation, scalability, a strong management team, a viable business model, market potential, traction, an exit strategy, and effective communication are key elements that enhance a business’s eligibility for angel funding. As entrepreneurs navigate the funding landscape, understanding and embodying these qualities increase the likelihood of attracting angel investors who can propel their businesses to new heights of success.
