What is an Angel Investor? Could they help you?
Date posted: 9 February 2015 | Posted in: General Marketing
“The term ‘angel investor‘ was first used to describe wealthy investors in Broadway productions in the early 1900s, but the term ‘business angel’ was first used in the 1970s,” explains Jenny Tooth, chief executive of the UK Business Angels Association (UKBAA), the national trade association that promotes angel investment.
“In return for a share of the early-stage business, angels invest their own money and make their own investment decisions. Usually they have considerable experience, knowledge and useful contacts.”
The UKBAA estimates that each year in the UK some 18,000 angels invest about £850m. “Most angels have successfully started or grown businesses, so they understand the business owner’s situation,” adds Tooth. “Some are full-time investors, often in more than one business, others are part time. Only about 5% of UK business angels are women, so we’re trying to attract many more successful business women.”
But why do they do it – is it just for the money? “Generally, angels are genuinely interested in helping small businesses to grow. They’re prepared to take risks, and yes, one day they hope to get a return, however, they may work with a business through several rounds of finance for up to eight years before exiting,” explains Tooth.
In more than half of cases, angels lose their investment, however, they can take advantage of tax breaks under the Enterprise Investment Scheme. “Return on investment is important, but many angels find it rewarding and enjoyable – they’re happy to share their knowledge.”
Angel investment can be a good option, because new businesses are often unable to access other sources of funding. “And if you’re trying to grow your business, having to pay back a loan each month can hinder your efforts,” Tooth adds. “The other key advantage is you can benefit from the angel’s experience and contacts.”
Ownership and control
Accepting angel investment means giving up a share of your business and some control. “An angel will expect a seat on your board, so they can offer strategic advice and input on key decisions, but day-to-day management will remain in the owner’s hands,” explains Tooth.
She says angel investment won’t be right if you aren’t aiming to sell or float your business. “You need to be ambitious and an angel will want to see evidence that you have the necessary drive, commitment and passion to achieve growth.”
The size of the angel’s share will depend on the value of your business, how much investment you need and the deal you can negotiate, says Tooth. “You shouldn’t expect to give up more than 30% of an early-stage venture. Angels want you to remain incentivised and you may need to retain enough shares to attract more investment.”
An average investment from an individual angel would be about £40,000, says Tooth, but it is possible to attract much more. “Increasingly angels invest in groups or syndicates,” Tooth explains. “Some businesses might be able to raise £1m or more from angel investors.”
Food for thought
Raising seed capital from angel investors in 2102 enabled Charlotte Knight to accelerate development of her gourmet food brand G’NOSH. “As well as investment, I wanted experienced investors onboard, people who could add value and help the business to grow,” she admits.
G’NOSH was one of the first new businesses to benefit from the Seed Enterprise Investment Scheme, which provides tax reliefs to investors. “The scheme enabled my business to get the six-figure investment it needed. Startups and small businesses need to look beyond traditional bank finance – there are many other options.”
The two angels who invested in G’NOSH were Robert Leechman, former chief customer and commercial officer at Coca-Cola, and Dale Murray, voted British Angel Investor of the Year in 2011, who co-founded Omega Logic and within five years helped grow it into a business with a £450m turnover. “The money was used to build the brand’s core strength and scale, as well as hire talent, pay for an office, create a marketing plan and develop new products.
“Obviously, I had to give up some equity, but it’s better to own a large share of a business that has the knowledge and funding it needs to grow, than retain full ownership and struggle on alone. The business has benefited hugely from Robert and Dale’s experience, knowledge and contacts. We now have many more customers.”
“We started looking for funding after the business was spun-out of the University of Oxford in 2010,” explains Kevin Arthur, founder and CEO of solar power glazing technology company Oxford Photovoltaics. “An investment syndicate was formed to raise the £700k to start the business and recruit staff. It was led by a well-known institutional investor in early-stage university technology spin-outs.
“A group of angel investors joined with another institutional fund and the World Gold Council. Angels were and are very important to us – these days it’s hard to imagine how technology startups could get off the ground without angel investment.”
Arthur says making sure angel investors genuinely believe in your vision and strategy is key. “Our angels are very supportive and have invested in two subsequent rounds of funding. They also introduced us to other investors.”
As a result, Arthur says his business has made “huge strides”. “We’re incredibly grateful for our angels’ belief in us. We’re now on the verge of commercialising our product and our angels have supported us throughout. Having such a strong syndicate of investors has enabled us to move quickly towards an exciting future.”
Code of conduct
To find an angel investor, you can carry out a free search on the UKBAA website. “Our members adhere to a code of conduct,” says Tooth. “Initially, business owners should send a short executive summary, not full business plan, because they may need to contact several angels before finding the right one.”
Tooth says there is a regulatory framework that protects angels and business owners. “Make sure the investor has self-certified as either a high net worth or ‘sophisticated investor’, as defined by the FSA under the Financial Services and Markets Act 2000. Carry out due diligence to find out much more about them – remember, you could be entering into a long-term relationship,” she concludes.