The world of modern business, despite having achieved incredible heights over the past century, still values ideas that are worth pursuing. Creativity, innovation and passion have always been at the very core of successful businesses.
This is apparent when you look at the start-ups that ‘make it’ to the top. And no, we aren’t just talking about the big tech names – even a relatively modest, local restaurant that offers something new, exciting and unique has the potential to make it to such a list.
At the same time, it must be conceded that not all ideas are fortunate enough to find the financial backing they deserve, especially from the traditional channels of business finance. Not all banks want to take the risk, not all venture capitalists have the time to go through thousands of pitches they receive every month, and not all high-street lenders understand how the whole thing works.
This is where angel investing comes into the picture.
What Is Angel Investing (Angel Finance)?
Angel investing is an important type of alternative finance options available especially to start-ups and SMEs in their early stages of growth.
Unlike traditional bank loans or business loans, angel investing comes from an individual (the angel investor). Angel investors are typically high net worth individuals who bring on board a great deal of experience in various business operations.
“Combine the angel investors’ ability to fund your ideas along with their experience and industry connections and you have a perfect launchpad to help your business grow.”
The Angel Investment Market In The UK
Angel investing has always been a popular choice among businesses because of its simplicity. Things took a turn for the better as the Enterprise Investment Scheme was introduced in 1993. Since then, over £18 bn has been invested through the EIS alone. The yearly projections by The UKBAA estimate that in 2020 over £2 bn will be invested in start-ups and pre-revenue business models.
Angel investing has also received a boost from an unlikely ally: the pop culture. Popular television shows like Shark Tank and Dragon’s Den have added a touch of glamour to the whole market and helped many first-time investors take the leap of faith and invest their time and money in local start-ups.
How Does Angel Investing Really Work?
As far as the UK angel investing market is concerned, the largest share of investment comes from small to medium scale investors who want to achieve two goals with such investments:
- Put their savings/disposable earnings to the most profitable use by investing in a venture that they can understand and help
- Claim important tax savings through the EIS.
For most business sectors, angel investors can claim up to £300,000 in EIS tax relief, while businesses cannot raise more than £5mn per year through the EIS. Given these numbers, it’s easy to see why most angel investments lie in the £10,000-500,000 range.
Syndicated angel investments, in which two or more angel investors team up to fund a business, can see this number go as high as £2mn.
Angel Investments Are NOT Loans
If you’re looking to fund your start-up with the help of angels, this is the very first thing you need to know: angel investments are nothing like business loans.
In exchange for the money your business receives, you’ll be required to give up equity to the investor. The amount of equity you ‘sell’ depends on the investment appetite of the investor.
Angel investments are inherently risky for the investor since they have to put their money on the line. The risk is mitigated by the potential of the business in question to provide returns that are significantly higher than those provided by other investment options.
Angel Investments And Equity
The only potential downside to angel investment, from the business owner’s point of view, is the sharing of ownership in the business. Most businesses, in their early stages, aren’t ready to give up a significant chunk of equity.
Angels, however, are open to negotiations when it comes to striking a mutually beneficial deal. Moreover, angel investors looking to make the most of EIS/SEIS tax reliefs cannot hold more than 30% of the equity.
It’s common for investors to ask for equity in the range of 5 to 20%.
Has Your Business Got What It Takes?
It’s not always easy to predict what an angel investor would look for in an investment opportunity. From what we, as a leading commercial finance broker, have observed over the years, there’s a recurring theme that you may want to judge your business by.
Real Life Value
Angel investors usually prefer businesses that aim to add real-life value. Products and services that solve real-life problems always make for a good pitch.
Angel investors, being individuals, prefer to work with people who are motivated and prepared to do what it takes to succeed. It’s not enough to just have an idea that works, it’s equally important for them to know that you believe in this idea. It’s probably the most intangible aspect of this discussion, but it’s as important as any other.
Investors, regardless of the type of investment in question, want to know that you have all your numbers figured out. This includes creating a well thought out business plan, among other things.
Questions to ask yourself:
Is your business idea viable? Is your main selling point intellectually protected? Will there be any potential conflicts with other parties?
Questions to ask yourself:
Is there enough room for growth? How do you plan to scale your business? Will the profitability/viability get affected at a larger scale?
Everything you do in terms of proof will count in your favour. From an intensive market survey and proof of concept to purchase orders and testimonials, just to name a few examples.
While it’s good to have a business that works not just in theory, it’s not a prerequisite. This eventually comes down to how the promising your business idea is in the investors’ eyes.
If you put yourself in the investor’s shoes, you can see why an exit strategy is important. Investors do not generally want to stay on board for decades. They prefer to have an exit window of 5-10 years in which they can make the most of their investment. How you plan on providing them this exit becomes, in this context, an important question.
Angel Investment And Business Stages
As we noted earlier, angel investments are best suited for start-ups that are in their early stages of development. There are three main business stages that are most likely to secure angel finance.
This is the earliest stage for an investor to come on board. Pre-revenue businesses generally have not much to stand on except the power and potential of the idea. It helps if this idea can be/is intellectually protected, has obvious benefits and is proven to work in real life.
Quite naturally, pre-revenue angel finance is fraught with risks, and investors may want a sizeable share of equity for their money.
Pre-profit businesses are the ones that have already set up shop (so to speak) and started trading. The revenue they generate isn’t enough to cover their expenses and debts.
At this stage, investors have enough evidence to visualise the profitability.
Post-profit businesses are the ones that have not only started trading but also gone beyond the break-even point. Such businesses rarely look for angel finance, but when they do, they have a very good chance of securing it.
Commercial Finance Network and Angel Finance: How We Can Help
As a leading whole of market commercial finance broker, Commercial Finance Network is best placed to match your business with angel investors who can offer invaluable industry experience, funding and expertise.
Our panel of private investors consists of UK-wide angels with years’ worth of investing experience. When you work with us, we make sure that your ideas – they may well be the next big thing – are placed in front of the right investors.
Angel investing is not just about money, it’s about the priceless experience and expertise that can make all the difference in the world. To know more or to request a call back, call us on 03303 112 646. You can also fill in this short online form to get started.