What is an angel investor and how could they help your start-up?

Starting any business naturally involves cost but attracting funding to get it off the ground can be challenging.

An angel investor could be the answer.

From start up costs, equipment, operations, and staff to grow your business, costs can mount up, but knowing the type of funding that is best for your business can be challenging, as well as accessing the financing you need.

Angel investment has overtaken crowdfunding as the second most common investor type in the UK equity market.

Despite a drop in investments in 2022, angel investment is the least affected by market conditions.

This guide outlines some of the benefits and potential drawbacks of an angel investor, but always seek independent and specialist financial advice when looking to obtain investment in your start-up, as individual circumstances will vary.

What is an angel investor?

An angel investor is an investor that offers financial backing to a business, typically a start-up or early-stage business, in exchange for a percentage of the company.

The investment is offered either as a one-off capital injection or can be ongoing support through the early years.

Angel investors can work independently or as part of a syndicate.

Individual angel investors usually invest their money and may work directly with the organisation to help grow the business.

With syndicates, a small group of angel investors with diverse expertise invest together, usually under a lead angel’s guidance.

Read our guide on how to get more investment to grow your business.

What are angel investors looking for?

Angel investors look for start-ups that offer a strong potential for growth and will produce high returns on investment (ROI).

The precise ROI rate is subject to the individual angel investor and the nature of the business deal, but usually, angel investors expect to see a 30-40% ROI over a three to ten-year period.

Since angel investors invest their own money, they often undergo extensive research and due diligence to ensure their investment is worthwhile.

As such, angel investors typically look for a start-up with the following:

• motivated, knowledgeable, and reliable founders
• a robust and thorough business plan
• some existing traction
• strong market potential
• high potential for scalability
• a unique selling point (USP) that puts it ahead of any competition
• an exit strategy, such as an acquisition.

Read our guide on ten ways to create a winning start-up pitch.

Why choose to work with an angel investor

Early investment

Angel investor funding can open doors for start-up businesses early on that can allow them to:

• purchase premises
• acquire inventory
• hire employees
• pay for operational costs
• pay for marketing materials, such as a website or social media content.

Read our guide on six ways to boost your website’s SEO.

Flexible funding

Funding from angel investors may be more flexible than if a business acquires more traditionally sourced financing, such as from a bank.

Agreement terms between angel investors and businesses can be flexible as the investor is investing their own money and, therefore, can negotiate terms that work for them and the company they are investing in.

Available funding

As a new business, meeting the criteria for a loan can be challenging as your start-up’s credit history may be limited, and your business may not have the trading history to qualify for funding.

Angel investors choose a business to invest in and may be more willing to take on the risk of investing in a company that the angel investor considers has potential.

No monthly repayments

Although each agreement between a business and an investor will have its own terms, angel investors often exchange their funding for shares in the business, meaning, unlike a business loan, you won’t have monthly loan repayments to meet.

Reduced risk

Bank loans often require security against the loan in case you cannot make repayments, but angel investors are investing in your business in exchange for shares, therefore taking the risk in the business’s success.

Ongoing mentorship

Angel investors typically have business experience meaning they can share their knowledge to help your business succeed.

Networking opportunities

Angel investors will often have contacts with experts from various industries.

Some of the ways start-up owners can benefit from this are:

• angel investors could put business owners in touch with experts to gain advice or learn any essential skills
• they could introduce customers to the business and set the foundations for stable client-to-customer relationships
• they could use their connections to allow business owners to get access to B2B (business to business) discounts or deals.

What are the drawbacks of using angel investment?

Although angel investors come with many advantages, it’s wise for start-ups to consider some of the drawbacks of working with an angel investor, such as:

Lack of control

An angel investor takes shares in your business in exchange for their investment, meaning you don’t have complete control of your business.

Consider that an angel investor could have a say on decisions that you may have taken on your own previously such as:

• the business’s brand
• the distribution of company funds
• the location and style of the premises
• the type of products or services stocked.

Pressure to produce fast results

Having an angel investor looking for a return on their investment can increase the pressure on your business to produce fast results and set revenue or growth targets, which can add pressure.

Investors may expect to receive regular reporting and constant updates, which can be time-consuming for start-up owners focusing on growing the business.

Broken relationship

If there are too many disagreements between the angel investor and the business leaders, a conflict of interest between the start-up team and the investor could arise.

This could have many ramifications for the business and potentially cause it to fail, with the angel investor pulling their funds or ceasing further investment.

Read our guide on what makes a business successful.

How to find an angel investor

There are several ways to locate an angel investor, such as:

Attend networking events

Networking events allow you to present your business plan to potential angel investors.

The UK Business Angels Association Summit is one way to put your business in front of potential investors.

Visit online platforms

Online platforms, such as the Angel Investment Network, are designed to connect businesses with potential angel investors.

LinkedIn

LinkedIn is designed as a business network and is another way to establish connections with possible investors.

Alternatives to angel investment

Angel investment may not be the right choice for every business, and there are some alternatives to this.

Other investment opportunities include:

• apply for a bank loan: providing you have a good credit score and sufficient capital, you can apply for a bank loan
• apply for a Start Up Loan: Start Up Loans offer new small business funding of up to £25,000, plus a year’s free mentoring to support you as you embark on your business venture.