Unlike Venture Capital investment, Angel Investment is not done by investment firms. Instead it is usually done by High Net Worth individuals or groups of individuals (a group of angels). Thanks to the Enterprise Investment Scheme (EIS/SEIS) that helps small, private companies raise finance, the Government offers an array of tax reliefs to encourage wealthy or sophisticated investors to invest in fledgling businesses and help them grow.
The investor(s) would normally take shares (an equity stake) in your business in return for providing equity finance (funds). In so doing, they normally seek to not only provide your business with money to grow but also bring their experience and knowledge to help your company achieve success. They will seek a return on their investment but they are, typically, not concerned about high growth and quick returns, as Venture Capitalists are. Instead, they are prepared to support the business over a longer period of time. Usually, Angel Investors will seek a return on their money over a 3 – 8 year period.
Angel investing adheres to a regulatory framework that both protects both the angel and the entrepreneur. Before proceeding with an Angel Investor the company should ensure that the investors have self-certified as either a High Net Worth or Sophisticated Investor – both of which are defined by the FCA under the Financial Services and Markets Act 2000 (FSMA).
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Securing Angel Investment
Angel Investors make their own decisions about the investments they make. They will engage with the entrepreneur directly, meeting them in person and often seeing them pitch their business. Angels will also, usually, get involved with the due diligence and investment process and will be signatories on the legal investment documentation. They will then usually take an active role in the business, either on the board or actively support the business with advice and contacts.
Angels also engage directly in the due diligence and investment process, and are signatories on the legal investment documentation. This can be done either on their own or with a syndicate. Angel investors then follow their deal either actively taking a role on the board or actively supporting the business, or may act passively as part of a group with a lead angel taking this role on their behalf.
It is vital that the entrepreneur has a product that is innovative and/or disruptive but also that they are highly backable and able to demonstrate the energy and motivation to make a success of their business. There are no second chances and the pitch has to demonstrate all these in the short time you have in front of the Angel.
- Pre-revenue, pre-profit and profit-generating businesses are all possible candidates for angel investment.
- For pre-revenue businesses you need a proven concept – attracted customer interest, or proven the product ‘works’ and be able to demonstrate your businesses.
- Taken steps to show you have a built a defensible position for the company for example by the use of copyright or having protected your brand. If you have a patentable idea you may want to raise angel investment to formally fulfill your patent application.
- Understandably, companies already generating revenue or better still, a profit, are sometimes more likely to secure angel investment as angels can see a higher likelihood of return.
- Pre-revenue businesses can often be very high risk ventures and businesses in this position will need to show ‘proof of concept’ or have a protected idea such as relevant intellectual property. Businesses in the medtech, cleanTech and other science-based industries are more likely to be pre-revenue when seeking angel investment.
- ‘Idea-stage’ businesses are typically not angel deals. ‘Family, friends and fools’ are often the investors for this business stage!
- If you are at the idea stage, you should consider accelerators. You may need to turn to your family and friends, possibly even grants at this stage.
What do Angels look for in a business?
The Management Team
The people involved in the business is one of the most important aspects of Angel Investors. Their experience, drive, skills, motivation and how they come across are key components when Angel Investors make a decision.
Whereas not all businesses can satisfy each of these considerations, being able to ‘tick the box’ for 5 or more (from the below) can be a good place to start: Uber raised funding from angel investors
- Solving a problem – Does the product, technology or service address a real challenge in the market or society – what is the pain you are solving?
- Disruptive – Is it likely to be disruptive and make a real impact in the marketplace or establish a new niche?
- Protected – Does the product or technology have identifiable intellectual property? This may be patentable or may be in the form of copyright or branding or other intangibles – and can you confirm ownership?
- Competitive – Do you have a defensible market position? What other businesses are in competition with this project? How does it compare and what is the unique selling point or advantage – or does have a first-mover advantage?
- Revenue – How does your business make money? Are there clear identifiable revenue streams? Are there likely to be good gross/net margins?
- Scalability – Do you have a scalable business model? Are you able to achieve explosive growth?
- Proven model – What kind of validation have you had in the market place? Are you already selling or has this been tested out with potential customers? Can you show the results of market testing/surveys?
- Market – What is the market size? Can you achieve a realistic potential market share?
- Tax relief opportunity – Is the deal EIS/SEIS-eligible and do you have advanced clearance (see below)?
- Exit – Do you have a desire and strategy for the exit?
And finally, are you prepared to give up shares in return for investment and to have an investor on your board?
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