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An Angel Investor is someone who invests their own money in a small business in exchange for a minority stake (usually between 10% and 25%). They tend to be entrepreneurs or people with extensive experience in the business world.
However, Angel Investment is about more than just money. Angels offer mentoring and support, and businesses that receive investment will generally benefit from the investor’s time, skills, contacts and business knowledge.
Angels take a hands-on approach. They will spend lots of time with the entrepreneur and help to push the business forward. It’s crucial that the Angel and the entrepreneur have a strong relationship, as they’ll typically spend at least five years working together closely.
Key requirement
You need to be clear about how you’re going to grow your business
Key benefit
You will form a close relationship with an experienced mentor, who will champion your business in their networks
Key consideration
Make sure you and the Angel have the same short-term and long-term goals for the business
“An Angel should be a trusted point of contact. They could be just a sounding board or even serve as a non-executive director. They’ll guide the entrepreneur and help steer the business towards growth and success.”
Rod BeerManaging Director, UK Business Angels Association
Who’s involved with Angel Investment?
Syndicate
Angels can invest alone, but usually they invest together as a syndicate. This is when a number of Angels work together to pool their money and experience.
Lead Angel
When a syndicate invests in a business, the Lead Angel is the person who co-ordinates the investment deal. The Lead Angel will also have the most contact with the business after the deal. They can act as an adviser or even as a non-executive director.
The Angel CoFund, a delivery partner of the British Business Bank, provides larger sums of money than syndicates can usually afford.
What are the regulations around Angel Investment?
Angel Investment regulations control the way businesses seek investment and make sure the investor is genuine and certified. Here are the two main regulations you should be aware of:
Under EIS, Angels cannot take more than a 30% share of a business, which makes sure that entrepreneurs stay in control and incentivised.
2. FSMA
The Financial Conduct Authority (FCA) regulates Angel Investment. The Financial Services and Markets Act 2000 (FSMA) states that Angels should self-certify as a High Net Worth or a Sophisticated Investor. This means they are suitable to receive business plans and invest in businesses.
“Anything can happen to a business along its journey. So, making money isn’t the primary motivation for Angels – or they just wouldn’t do it. It’s as much about being a part of the entrepreneurial journey and seeing the success of a business that you backed.”
Jenny ToothAngel Investor and CEO, UK Business Angels Association
Benefits of Angel Investment
Expert mentoring
Angels offer strategic, financial and sector-related advice to help achieve growth.
Retain control
Angels typically take a 10% to 25% share of a business, which leaves the entrepreneur firmly in control.
Validation
Angel Investment can give a business credibility for later rounds of investment (from VCs, for example).
Risks of Angel Investment
No promise of growth
There is no guarantee that your business will achieve growth as a result of the investment and the Angel’s involvement.
Is Angel Investment right for me?
About your business
Business stage
Generally early stage, pre-revenue or pre-profit
Annual turnover
Less than £5 million
Sectors
All sectors, but especially suitable for companies with a scalable business proposition
Regions
All regions
About Angel Investment
Key benefit
A passionate and knowledgeable partner, committed to your business’ success
Purpose of finance
Working capital, product development, entry into new markets, build teams, increase sales
Amount of finance
Usually £15,000 to £500,000, but large syndicates may offer up to £2 million
Duration of finance
Typically 3–8 years
Cost of finance
None
Time to finance
2–6 months
Key things to consider
EquityYou’re giving away a small share of your business, so make sure you understand the terms and are comfortable about what you’re getting in return.
Long-term pictureYou may have to ask for some more money later so it’s important to be transparent about how many funding rounds you might need.
Eligibility for EIS If you’re looking at EIS tax breaks, make sure you’re eligible before you speak to an Angel.
TimeTracking down the right Angel or Angel syndicate can take time, so consider all of your options.
Advice from an Angel Investor
Jenny Tooth, Angel Investor and CEO, UK Business Angels Association
Unlike Venture Capitalists, Angels don’t go into weeks of research and analysis. I’ll decide quite quickly whether or not to invest in a business, based on the following:
Personal connection
Do we get on? Are we going to be able to spend the next eight years together? Do you have a story I can engage with? Can you accept my guidance?
Passion
Do you have the drive to see your plans through? Are you committed to your business?
Honesty
Are you being transparent with me about your story and your numbers?
Understanding
Do you know how much money you need and when you’re going to need it? Do you know what’s involved in the journey to grow your business?
Proof
Can you provide evidence of your financials, patents, customer loyalty, incorporation and market research?
“When you begin pitching for investment, I don’t know you yet, so you have to captivate me and capture my interest. Your story of why you set up this business is so important in your first approach.”
Jenny ToothAngel Investor and CEO, UK Business Angels Association
What do I need to know before I apply?
Angel Investment doesn’t happen overnight, so prepare to network and do your research. Take time to prepare your pitch.
It usually takes about six months from your first approach to the Angel to get finance.
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An IPO (or Initial Public Offering) is when a business sells shares via the public markets, such as the Main Market or AIM operated by the London Stock Exchange.
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Businesses can borrow money on demand up to the limit of their overdraft. Overdrafts can be expensive, but a business will only pay interest on the amount they actually borrow.
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