Angel investors explained

Trying to get a start-up business off the ground can be challenging, but extra funding from a business angel investor could be the leg up you need to make it a success.

By Martin Brackstone on 04/11/2019

What could angel investment mean for your business? | iwoca

Airbnb, Twitter, Uber… Sound familiar? Even these colossal household names got help from angels. So if you have a killer business idea but not enough financial backing, then it’s time to swot up with our essential guide to business angel investors.

What’s covered in this guide?

What is a business angel?

A business angel (otherwise known as an angel investor), is someone who helps a business by investing their own personal money.

Business angels will be looking for opportunities to take entrepreneurs and start–up companies to success. But their contribution doesn’t just take the form of an investment: a business angel tends to have entrepreneurial experience themselves. Therefore, along with their money, they may also be able to offer their own time, advice, guidance and business contacts. It really can be a hands-on investment, where the angel acts as more of a guide or mentor, using their resources to help bring a business vision to life.

Of course, this comes at a cost. And even with a name like angels, these investors unfortunately aren’t giving away money just out of the goodness of their hearts. An angel will likely expect to gain a percentage ownership of your growing business. And as they are taking a big risk by investing their personal money, many angels will expect to see a big return on their investment.

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But why are they called angels?

Although they don’t sport wings or halos, the term does come from the world of theatre, stages and costumes. Back in the 1900s, Broadway producers would turn to the wealthy for financial help – those who gave money were called ‘angels’. Today, successful angels investors are better known for supporting tech start–ups.

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Types of business angel investor

For many entrepreneurs, the search for funding will often start close to home – with wealthy friends or family. Outside of your inner circle, there are still plenty of opportunities for angel investment. But when partnering with someone you don’t know, it’s always useful to recognise what kind of angel you would like to work with, as there are lots of different types. Here are some of the most common:

Entrepreneur angels

Having been successful entrepreneurs themselves, they now back businesses as an alternative way to generate income. They tend to invest the largest amounts for startups.

Enthusiast angels

Unlike the entrepreneur angels, enthusiast angels see investment opportunities as more of a hobby. These angels tend to be in their later years, looking to make smaller investments across a number of companies. As this is ‘just for fun’, they won’t take an active role in managing the companies they invest in.

Corporate angels

Having previously come from a senior position at a large corporation, corporate angels are looking for profitable investment opportunities – which also comes with a job. As part of the deal, these angels are after a paid position, and are therefore typically involved in just one investment at a time.

Micromanagement angels

Micromanagement angels have typically found success through their own ventures and efforts. In return for their investment, they would expect a place on the board. From this position, they won’t look to reinvent the wheel – employing the same strategies that they’ve used with their own previous companies.

Professional angels

These angels are professional doctors, lawyers, accountants, etc. who invest in companies from within their field. They may even offer their services to the company at a reduced rate.

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Benefits of using business angel investors

When it comes to funding, new businesses don’t always get the same opportunities as more established companies. Angel financing is a great way to help those start–ups gain momentum and grow to their full potential.

Along with the extra money for your business, there are a great number of other benefits that come with working with an angel investor:

They’re willing to take a risk

As angels tend to have an entrepreneurial background themselves, they may have an understanding of what you’re trying to achieve and the risk that entails – but that can mean they are more comfortable taking on that risk themselves. If you can convince them that your idea is worth their money, then they could be open to offering larger sums of money than the bank or venture capitalists.

More than money

Business angels aren’t just offering their money – their pot of gold may also contain experience, knowledge and guidance. Some angels may come with a network of people – other business angels, potential suppliers, distributors or buyers. “It’s not what you know, it’s who you know” is a cliche in the business world for a reason, and angels will be able to introduce you to more of the right people.

There’s no interest

Unlike standard loans, most angel investments are interest–free and don't require monthly repayments. Even if your business never takes off, you won’t be expected to pay back the funds. With a business angel, you instead have the agreement of an investment in exchange for a stake in your business. And if your business turns into a roaring success, then you both get to enjoy the benefits.

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Where can I find angel investors?

If you’ve been wondering how to find business angels, then angel networking organisations could be a great start to finding investors who are interested in your idea.

It’s worth keeping in mind that many angels will prefer to meet face–to–face and hear pitches, but there are plenty of great online resources that can help you get started with your search right away:

UK Business Angels Association

The UKBAA has the UK’s largest directory of early-stage investors, advisors and intermediaries. So if you’ve wondered how to find angel investors for small business, this could be a great place to start. And with the directory, you can do your research on them first before approaching them with your idea.

Angel Investment Network

On platforms like this, you can upload a pitch and connect with a global network of potential investors.

Crowdcube

Crowdfunding sites may not be your first port of call. But 45% of business angels invest on or alongside crowdfunding platforms. And you could be their next opportunity.

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Business Angel Investors FAQs

What’s the difference between angel investors and venture capital investment?

Where angel investors are wealthy individuals looking to invest their own money, venture capitalists are employed by venture capital firms to invest other people’s money into businesses.

One of the main differences between an investment from an angel versus a venture capitalist is their level of involvement. Angels usually take a hands-on approach, working closely with the company to guide them to success. This means angels are also more likely to be supportive of a business in the longer–term – unlike venture capitalists who may be looking for a rapid return and a swift exit.

Both angel and venture capital investments will take on high risk. However, venture capital funds tend to be more risk averse, and make larger but fewer investments.

Are business angel investors regulated?

There is a regulatory framework which is there to protect both angels and entrepreneurs. Before a pitch is accepted, or business plans are passed, you should make sure that your investor has self–certified as either a High Net Worth or Sophisticated Investor, as defined by the FCA under the Financial Services and Markets Act 2000.

What is a business angel investor network/syndicate?

A business angel investor network is a collection of angels who can meet, discuss opportunities and invest in businesses. Sometimes networks are specialised by region, or sometimes by industry.

When angels are organised in this way, it makes it easier for them to make joint investments with other like-minded investors – allowing them to share the risks as well as the rewards.

What are the alternatives to using angel investment?

You can’t guarantee that your idea will attract the angels you need – and it may not be the best way to find investors for your start–up. Thankfully there are alternative ways to secure capital for startups, such as:

Small business loans

iwoca is one of Europe's leading lenders and offers loans between £1,000 and £200,000 to small businesses. An application can be completed in minutes online with the funds usually being available within 24 hours.

Grants

The government offers small business grants to businesses that meet certain criteria. The money awarded could be what you need to get started, but it is likely to be smaller than other types of funding.

Crowdfunding

Business crowdfunding bypasses traditional sources of finance, such as banks and venture capitalists. Instead, you can raise the money directly from a ‘crowd’ of individuals, groups and investors need directly from the public or from a group of investors.

Venture capital

Similarly to angel capital, venture capital is a way to secure funding in exchange for a stake in your business. These investments are typically high–risk/ high–return opportunities – so they’ll be looking for start–ups that ooze potential, and will also expect the founder to give up a significant amount of equity.

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