Angel investors

For newer or smaller businesses, accessing debt finance can be difficult, this is especially true if your business is pre-revenue, pre-profit, requires a lot of initial capital to develop a prototype or doesn’t have a strong credit history.

Fortunately though, there are alternatives to debt finance to fund the growth of a smaller business.

Angel investors are the largest source of investment in start-ups and early-stage businesses looking to grow in the UK.

In this guide we explain what angel investors are, the pros and cons of bringing an angel investor onboard, and what an angel investor looks for in a business.

As with all types of business finance, it’s a good idea to seek independent specialist advice before deciding which type of finance is right for you and your business.

What is angel investment?

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%).

Angel investors 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.

Angel investors 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.

Typically, angel investors can invest sums ranging from £5,000 to £500,000 in any one business.

The precise amount depends on the specific requirements of the business and its potential for expansion.

Who are angel investors?

Syndicate

Angel investors can invest alone, but usually they invest together as a syndicate.

This is when a number of angel investors 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 benefits of working with an angel investor?

There are a number of possible advantages for smaller businesses looking for capital to go explore angel investing:

Expert mentoring

An angel investor offers strategic, financial and sector-related advice to help achieve growth.

The majority of angel investors come with a wealth of experience in investing, which enables them to offer invaluable support, networking opportunities, and mentorship that can significantly contribute to your business's success.

Their expertise, understanding of the market, and wealth of resources can play a pivotal role in propelling your business's growth trajectory.

Retain control

Angel investors typically take a 10% to 25% share of your business, which leaves you firmly in control.

Some venture capital schemes (see below) also stipulate that an investor cannot take larger than a 30% stake in a business, ensuring founders retain control of their business.

Validation

Angel investment can give your business credibility for later rounds of investment (from venture capitalists, for example).

When a business receives backing from an angel investor, it gains more than just financial support.

Such an endorsement bestows upon the business a certain level of credibility and reputation within the industry.

This is because the investment signifies the investor's faith in the potential success of the business, which can, in turn, draw additional investors and funding sources to the venture.

No interest or repayment terms

Unlike a debt product such as business loan, equity investment does not require the business to repay back any funds or pay interest on the capital borrowed.

This is because angel investment is a sale process as opposed to a loan process with the angel invest exchanging shares in the business for capital.

The success of the start-up becomes a shared venture - if the business prospers, both the entrepreneur and the angel investor stand to gain significantly from the increased value of their stakes.

However, there's a risk involved for the investor; if the business does not succeed, the business angels will not be able to recoup their investment.

What are the drawbacks of angel investing?

Business angels can be a crucial lifeline for new business owners during the initial stages of their venture. However, this funding model does come with its set of drawbacks.

Loss of control

The most significant disadvantage is that entrepreneurs often have to part with a substantial equity stake in their start-up, ranging from 10% to 25%, in return for the necessary capital.

Angels tend to adopt a hands-on approach once they invest in a start-up.

Leveraging their experience, they usually prefer to have a contingency plan, such as an exit strategy if the business fails.

This could involve selling the start-up to a larger firm or preparing it for an IPO.

Consequently, they might persuade you to sell your start-up prematurely.

Moreover, if you relinquish excessive equity to business angels, it might result in a loss of control over your own company.

They may decide to bring on board a seasoned executive, and in the worst-case scenario, potentially agitate for your removal from the company you founded.

Higher expectations

The willingness to take on higher risks is often accompanied by greater expectations.

For many angel investors, their primary objective will be to generate substantial profits, leading them to anticipate a hefty return on investment (ROI).

They commonly anticipate an ROI equivalent to tenfold their initial investment within a span of five to six years.

Therefore, prior to accepting funds from an angel investor, it's crucial for entrepreneurs to assess their company's potential for growth at the pace expected by these investors.

Determining and aligning these growth expectations is a vital part of this evaluation process.

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.

Risk of a bad fit

It’s a good idea to carry out due diligence on any angel investor to ensure that they are the right fit for your business.

Due diligence ensures that the investor has the necessary familiarity with your sector and allows you the opportunity to understand if you’ll have a good working relationship moving forward.

You should also take care to understand what the angel’s expectations are around ROI and long-term aspirations for your business.

Learn more about carrying out due diligence on investors.

Venture capital schemes

Venture capital schemes, run by the UK government, are designed to encourage angel investors to engage with businesses seeking investment.

Here are the two main schemes you should be aware of:

• Seed Enterprise Investment Scheme (SEIS)
• Enterprise Investment Scheme (EIS)

EIS and SEIS give angels generous tax breaks.

By making investing less risky for investors, the schemes help businesses grow.

Under EIS, angel investors cannot take more than a 30% share of a business, which makes sure that entrepreneurs stay in control and incentivised.

Seed Enterprise Investment Scheme (SEIS)

The Seed Enterprise Investment Scheme (SEIS), launched in 2012, is a program initiated by the UK government with the aim of promoting economic growth and innovation.

It does this by encouraging private investors to acquire shares in smaller enterprises.

This scheme provides support to smaller, often newer businesses, enabling them to secure essential capital for growth through private equity investment.

Businesses utilising the SEIS are allowed to raise a maximum of £250,000, though the overall limit is capped at £350,000.

There is also a restriction on investors, with an annual limit set at £200,000.

Learn more about the SEIS.

Enterprise Investment Scheme (EIS)

The Enterprise Investment Scheme (EIS), established in 1994, is a program that offers tax advantages to individual investors who acquire new shares in a company.

This initiative can enhance a company's appeal to investors, facilitating the raising of capital and the expansion of its business activities.

In terms of fund-raising under this scheme, a company is permitted to accumulate up to £5 million each year, subject to a lifetime ceiling of £12 million.

Under EIS, angel investors cannot take more than a 30% share of a business, which makes sure that entrepreneurs stay in control and are incentivised.

Learn more about the EIS.

Who regulates angel investment?

The Financial Conduct Authority (FCA) regulates angel investment.

FSMA states that angel investors should self-certify as a high net worth or sophisticated investor.

This means they are suitable to receive business plans and invest in businesses.

Is angel investment right for me?

Angel investment isn’t for every business so it’s important to understand what type of business angel investors might be interested in and also what conditions the finance might include.

Angel-investible businesses

• 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

About the angel investment

• Purpose of finance: Working capital, product development, entry into new markets, build teams, increase sales
• Amount available: Usually £15,000 to £500,000, but large syndicates may offer up to £2m
• Duration of finance: Typically 3–8 years
• Cost of finance: None
• Time it can take to get finance: 2–6 months

What do angel investors look for in a business?

We spoke to Jenny Tooth, angel investor and CEO of UK Business Angels Association, to understand how an angel investor chooses a business to work with.

Personal connection

Unlike venture capitalists, angel investors 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:

• 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?

What do I need to consider about angel investing?

Getting an Angel on board 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.

How do I get angel investment?

To learn what steps you need to take to prepare your business, use this checklist.