Are you looking for an experienced and motivated business partner? Do you need to raise finance for your growing business? If so then going into partnership with an angel investor (sometimes called a business angel) could be a great solution. But you need to make sure it’s right for you, because it involves selling part of your business in exchange for finance.
In this guide we explain how using an angel investor works and the pros and cons of using one. We also answer common questions like “how much money do angel investors invest?” and “what do angel investors expect in return?”
Table of Contents
- What are angel investors?
- What are the pros & cons of using an angel investor?
- How to prepare to meet an angel investor
- Frequently asked questions?
What are angel investors?
Angel investors are wealthy individuals who invest in small and start up businesses. They help them to grow and then recoup their investment when the business is sold.
Most angel investors are experienced entrepreneurs who have built up their wealth by running successful businesses.
How does angel investing work?
Angel investing is a type of equity finance. It works by selling a stake in your business to an angel investor. In exchange they give you a cash injection and also get involved in helping you with business decisions. They usually take a back seat so you need to carry on running the business yourself.
The amount an angel investor will invest depends on the value of your business and the amount of capital or equity you’re prepared to sell. For example, if your business is valued at £1,000,000 and you want to raise finance of £200,000 you would sell 20% of your business to the investor in exchange for £200,000 cash.
What is angel investing for?
Angel investing is particularly useful for new or small businesses. These businesses might find it difficult to get a large business loan with a traditional lender as they don’t have a proven track record.
You can use funding from angel investors for a range of different uses including the following:
- Hiring more staff
- Paying for stock
- Funding an expansion
- Renting or renovating a new premises
- Funding marketing material or a website
What are the pros & cons of using an angel investor?
Here are the main pros and cons using an angel investor:
- Suitable for small and start up businesses - new businesses that can’t get finance elsewhere may be able to get funding from an angel investor. Investors will consider businesses without a proven track record if they have a great business plan and the ability to grow quickly.
- No interest payments* - interest won’t be due on funding from an angel investor, making it cheaper in the short-term than loan finance.
- **No capital repayments - angel investors won’t expect you to pay back the capital they’ve invested, although they will expect a plan to be able to access their money in the future.
- Expert advice - investors are often experienced entrepreneurs and can give you valuable business advice.
- Business contacts - angel investors often have a large network of business contacts that may be able to help you develop your business.
- Access to future funding - investors will often consider investing more finance if you need funding in the future.
- Motivated investors - investors are highly motivated to help you make the business a success because they have invested their own cash.
- Unsecured - you will not be risking secured assets if your business venture fails.
- Suitable for rapid expansion - if you want to expand quickly then angel investors are more likely to fund your business than traditional lenders.
- Expensive - angel investors are taking a big risk by investing in a new or small business. In exchange they usually expect a higher return than a traditional lender.
- Slow to arrange - finding an angel investor can take longer to arrange than debt finance.
- Professional costs - you will need to get advice from lawyers and accountants on the legal terms and tax implications of your agreement.
- Lose control - the angel investor will own part of your business and will want to be involved in business decisions.
- Reduces your profit share - equity finance waters down your ownership of the business, reducing your future earnings.
- Risk of conflict - many investors want to work closely with their business partners. If you don’t get on with the investor, this could cause problems. That’s why it’s important to make sure you and your investment partner are a good fit.
How to find an angel investor?
There are many ways to find an angel investor. There are a growing number of investment platforms that connect business owners with angel investors. Here are some websites to consider:
How to prepare to meet an angel investor?
Applying for finance with an angel investor can be a daunting process. You need to make sure you are well prepared before you start to meet or speak to potential investors. They are investing their own personal wealth so will want to understand your business in detail. They will need to know how the investment will be spent and the likelihood your business will provide a profitable investment.
It’s important to prepare for your discussion with the angel investor by understanding the following:
- How to sell your business and product - many experts recommend practising an “elevator pitch”: a brief and persuasive speech to sell your business.
- The valuation of your business - a specialist accountant can help with this. Make sure you understand the details of the valuation so you can discuss it with the investor.
- Any tax implications of equity finance
- What proportion of your business you’re prepared to sell - this will be part of your negotiation with the angel investor.
You will also need to prepare the following information for the angel investor:
- Financial records - including previous financial statement, cash flow records and bank statements
- A business plan - this should include your plans for the business; information on what gives your business a competitive advantage (do you sell in a niche market or have a great product that’s different from your competitors) and how you plan to use the investment
- Details of any patents or intellectual property
- Information on your team - include details about their expertise in your business area
How to choose the right angel investor
Choosing the right investor for your business is a two way process. You need to make sure that the investor is right for your business, as well as finding someone who wants to invest in you.
If you’re considering an angel investor then it’s important to find someone who is excited about your business. Here are some questions to consider when you’re speaking to potential investors:
- What experience do they have in your business area?
- Do they have useful business contacts?
- Do they share your vision for the business?
- What involvement will they expect going forward?
- Does the angel investor have cash to fund potential future funding rounds?
- Do you get on well with the investor? You might be working with them for a long time!
- How will they access their share of profits?
- Is the legal agreement acceptable? Get advice from a specialist account to see if there’s anything unusual to watch out for.
Frequently asked questions
Angel investors will usually consider investing between £50,000 to £500,000 depending on the value of your business and how much equity you are selling.
Angel investors are busy people and receive many emails from potential business partners. Here are some tips to make yours stand out:
- Personalise your email - address them by their name
- Be professional - make sure your email is clear, professional in tone and doesn’t have any mistakes
- Explain who you are and what your business does - give details of your background the history of your business
- Sell yourself - briefly explain the achievements of your business, any awards, press mentions, relevant statistics and social media highlights (if you have a lot of followers etc.)
- Get the balance right - an initial email should be a “soft sell” rather than a “hard sell”. Briefly explain what you want but keep the details for a future discussion.
- Attach relevant details - you can attach a brochure about your startup business
- Keep it brief - don’t write more than a couple of short paragraphs.
- Ask for a meeting - ask if the investor has time for a quick 10 minute chat.
After your email, keep a record of the progress of different enquiries so you don’t lose track of where you are up to with different investors.
Using an angel investor usually costs more than debt finance in the long run. This is because there is a high risk that start up businesses fail, so angel investors expect to get a higher return on their investment. They will usually ask for at least 20-25% of your business in return for their investment.
You may also have significant legal and professional costs.
Angel investors usually expect to get their investment back when the business is sold for a profit. Once the business is established, some investors will also take dividends to access their profits.
Most investors will want you to carry on running the business but will expect to be involved in bigger decisions.
Angel investors are individual wealthy investors whereas venture capitalists are usually a group of investors. Some venture capital firms are listed on the stock market.
Venture capitalists won’t usually consider investing in very small or start up companies. They also have a higher minimum investment level than angel investors and won’t consider investments of less than £100,000.
Angel investors usually get their money back when the business is sold in the future.
You should get advice from a specialist accountant about how to value your business. The valuation will take into account your existing profits and assets as well as your future earning potential.