You might have heard the term, but what are business angels? Investment from business angels normally involves the ‘Angel’ taking shares in the business in return for providing equity finance. There are similarities with the concept of the BBC Dragons’ Den programme which uses the name Dragons rather than angels.
An angel investor makes use of their personal disposable finance and makes their own decision about making the investment. In return, business angels would normally seek to not only provide the business with money to grow, but also bring their experience and knowledge to help the business achieve success.
Business angels are typically a former entrepreneur or professional who provides starting or growth capital to promising ventures, and helps also with advice and contacts. Unlike venture capitalists, angel investors usually operate alone (or with a syndicate) and play only an indirect role as advisors in the operations of the investee firm. Angel investors seek to have a return on their investment over a period of 3-8 years.
The angel investment market
Business angel investing is the most significant source of investment in start-up and early stage businesses seeking equity to grow their business. Whilst the market is relatively difficult to calculate since many business angels are investing privately, an estimated £850m per annum is invested by angels in the UK. This is more than 2.5x the amount of Venture Capital invested in early stage small businesses annually.
Is angel investing regulated?
There is a regulatory framework for angel investing which both protects the angel and the entrepreneurs; before passing a business plan to a potential angel investor business owners should ensure that the 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.
How much do angels invest in a business?
In general, individual business angels will invest anywhere between £5,000 and £200,000 in a single venture, depending on the business and the growth needs. But this can be lower and occasionally much larger sums according to the disposable wealth of the individual and the opportunity identified.
Also with an increasing trend towards angels investing in groups and syndicates, larger amounts of finance above £1m can be raised by investors pooling their finance and also their business skills.
What do angels look for when making an investment?
For angel investors looking to invest in a start-up or early stage business the focus is primarily on the people involved, but of course they will also look carefully at the project itself, particularly the product or service, the market and whether the concept is scalable. If everything else stacks up the core aspects of negotiating the deal are very important.
However, for start-up or early stage businesses, the capacity and experience of the entrepreneur and management team has been shown to be the most significant aspect for angel investors when deciding to make an investment.
Business angel networks run a regular programme of pitching events where the investors can see the selected business propositions and where the entrepreneurs have received advice and support with preparing their pitch. These events offer an opportunity to see pitches, meet and talk to the entrepreneurs and interact with investors. There are many business angel networks operating around the UK.