Angel investors are also known as business angels. With money to invest in growth opportunities, they’re a vital source of funding for many start-up businesses.
But how do angel investors work? And perhaps more importantly, how to find angel investors? Here’s our explainer.
An angel investor is a person (or group of people) with money to spare, looking for the next big opportunity to not only invest and make a return, but also to share their expertise and build a business.
It’s a cliché, but when thinking about angel investors, the BBC’s Dragon’s Den might spring to mind. While the drama is heightened for TV, broadly speaking the concept is the same.
Usually, angel investors will be looking for innovative businesses that have the potential to scale and grow quickly. These businesses might have invented brand new products, technology, or services that solve huge customer pain points. But they need a combination of funding, expertise, and connections to take their business to the next stage of its journey.
Angel investors will invest in return for a stake in your business. This could be up to 50 per cent but is usually smaller (between 10 and 25 per cent, according to the British Business Bank). This is based on your business’s valuation, which is why the BBC’s Dragons grill business owners on how they’ve valued their business.
Keep in mind that you don’t just get funding in return for a stake in your business. The big draw in working with these types of business investors is the time they spend with you, working on (and growing) your business. It’s therefore important that you work with a business angel who you have rapport with.
Firstly, work out whether angel investment is right for your business. If it’s in its early stages (pre-revenue, pre-profit, or profitable early stage), you have clear plans to grow and you don’t mind giving away a stake in your business, it might be an option. Also consider these:
Then, make sure that you’re prepared with your story, pitch, and plan before looking for angel investors. The British Business Bank has a great angel investment checklist you can use to get ready – some of the key tips include:
Here are some guides and templates that can help you work on your business’s story:
Angel investment is often compared with venture capital, but there are big differences. Firstly, venture capital firms are businesses in themselves, rather than individuals. Venture capital involves board members, other employees, as well as private investors, all expecting a big return on their investment.
With that in mind, there’s usually bigger sums involved with venture capital (according to Virgin StartUp, venture capital firms are unlikely to invest less than £1 million). They take longer to make decisions on investment and are more likely to invest in proven businesses, rather than early-stage startups.
The trade body for angel investors is called the UK Business Angels Association (UKBAA). It says that the first port of call should be your personal and professional network – referrals from people you already know can help you get a crucial introduction.
The UKBAA says it’s important you don’t approach people just asking for money. Instead, look for support and guidance and communicate a strong story about your business – this will filter through your network.
After that, try to network with other entrepreneurs working in the same industry. Again, ask for guidance and feedback and try to build a strong relationship, rather than asking for funding. The UKBAA says that LinkedIn and industry events are strong places to start.
The UKBAA also has a member directory you can use to look for angel investors. It’s free, but you’ll need to sign up for an account.
Of course, you could also apply to go on the BBC’s Dragon’s Den. Tellingly, the BBC says applications go through ‘casting criteria’, so the producers won’t just be looking for compelling business pitches. But if you get on the programme, it’s not only a great funding opportunity – it’s huge publicity for you and your brand.
Finally, there are networks that help connect businesses with angel investors. Take a look at:
You can also visit the British Business Bank for more information. The British Business Bank runs the Regional Angels Programme, which "aims to raise the profile and professionalism of angel investment activity" across the UK. The government committed a further £150 million to the programme at Autumn Budget 2021.
This article was updated 29 October 2021 to mention the Regional Angels Programme.
Are you looking for an angel investor? Tell us about your experiences in the comments below.
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