It’s a triumphant week for women founders – and a significant moment for angel investors. Thanks to widespread campaigning from women founders, the government has made a complete u-turn to reverse the new rules recently imposed on investor criteria, following criticism that these new rules would widen the gender funding gap.
Investors on angel platforms had previously needed to earn over £100k to qualify for angel status. In January 2024, the threshold was raised to £170k. Female investors who generally earn less than male counterparts, as well as those from minority ethnic background or based outside of London, so there was a huge risk that this new higher threshold would lead to reduced representation among angel investors.
Angel investors are the largest source of investment in start-ups and early-stage businesses looking to grow in the UK. And as such, they play a huge role in deciding which businesses get off the ground. So it’s really important that a broad range of perspectives are represented, allowing founders to access their target audience when seeking angel investment.
But what exactly is angel investing, and how do you go about securing it for your business? It’s a question we’re often asked by the start-ups who use our coworking space in London. So in this blog post, we’ll explain who angel investors are and what they do, the advantages and disadvantages of accepting angel investment for your business, and the key things that an angel investor looks for in a start-up.
What is an angel investor?
Angel investors are individuals who invest their own money into a start-up or small business in exchange for a minority stake, which is usually 10-20% of the business. If you’ve ever seen Dragons Den, you’ll have seen this play out in real time – the entrepreneur pitches their business, and one of the angel investors or ‘dragons’ offers them money in exchange for a small stake in their business.
This minority stake technically makes the angel investor a shareholder, though their proportion of shares is too small to allow them to exert control or influence over a business’s corporate action. And while that limits the power they have over your company, it’s inevitably true that accepting angel funding will come with certain terms and conditions that you’ll need to meet. There’s no such thing as free money!
You might come across examples where businesses have received investment from an angel investor syndicate. This is an example of when high net worth individuals ban together to form angel investor groups, who then pool their funds and experience to be able to invest in multiple start-ups and build a portfolio of investments.
In this case, there’s usually a lead angel, which is the person that negotiates the initial deal and then has the most involvement with the business after the deal has gone through. They can act as an adviser or even as a non-executive director.
We see a lot of start-ups come through our doors here at Impact Brixton, and a question we’re often asked is are angel investors venture capitalists?
Why do angel investors invest?
While some angel investors invest for philanthropic reasons, usually angel investors invest to make money. That’s why angel investors are often business experts with experience of scaling their own successful start-ups – they’ve got a razor sharp eye for businesses that have the potential to be hugely profitable, which will allow them to generate a huge return on their investment.
And in order to make sure that their investment is profitable, angel investors often attach certain angel investor criteria to the money they give you. For example, angel investors commonly anticipate a return of investment equivalent to ten times their initial investment within a span of five to six years. And in the case that this doesn’t happen, they often put in place an exit strategy in case the business fails.This could involve selling the start-up to a larger firm, or preparing for the company’s stocks to be sold on the market. That’s how angel investors make money, even when the business they originally invested in fails.
When do angel investors invest?
Typically, angel investors invest in a business that is just getting started, which means that it’s either in the seed stage or early stage of its conception. This is all to do with how angel investors work – angel investors for startups tend to like to use their expertise to help founders shape their businesses, ensuring that they’re likely to be profitable. And they’re most able to do that if they get involved in a business early on in the process.
When do angel investors get paid?
This is all to do with when an angel investor receives a return on their investment. This typically happens when the company that they invested in is acquired or goes public. This allows the angel investor to reap the rewards from the sale of their shares, which may be structured in the form of a one-time payout, or through a series of payments over time. Alternatively, angel investors might get paid periodically by receiving a portion of the company’s profits or a share of equity in the company.
Angel Investors: Advantages and Disadvantages
So, the big question – are angel investors a good idea? While there are certainly plenty of pros to what an angel investor can do for your business, there are some cons to consider. Here’s what you need to consider.
Angel Investors Pros
1. Financial Support
There’s no denying that angel investors provide a huge cash injection when businesses need it the most. And unlike traditional bank loans, there’s no repayment plan and interest rate. Instead, they’ll negotiate a non-crucial stake in your business, allowing you to retain decision-making powers when it comes to your company’s operations.
2. Expertise and Mentorship
The angel investor definition usually includes a whole lot of experience in creating, scaling and selling hugely successful businesses. So it’s likely that the person you’re bringing onto your business has a huge range of skills and expertise that they can teach you. And while the money they give you is definitely nice, that expertise is invaluable. It could help your little idea become an enormous business that stays successful for years to come.
3. Validation and Networking
As well as that all-important cash injection, angel investors can also bring you a huge network of experienced business owners who could become your clients, colleagues, mentors and collaborators. And while a cold email from you to any of these busy people might previously have been met with silence, a personal introduction from someone they really respect is likely to get you some face-to-face time. So it’s definitely worth asking your angel investor to connect you with their network. There’s no limit to the advantages that an angel investor list can bring you.
Angel Investors Cons
1. Loss of Control
While angel investors don’t take a decision-making stake in your business, it’s unrealistic to expect that the person investing in your company will just sit back and let you get on with it. And while you might benefit hugely from your angel investor’s guidance, it’s really important to make sure you read their terms carefully. In order to guarantee a return on their investment, you might find that they have conditions regarding the point at which a company is sold, and a timeframe that they expect you to stick to. So make sure you’ve discussed your angel investor’s expectations in detail!
2. Limited Funding Capacity
Although angel investors can be really helpful in getting a company off the ground, when it comes to scaling you might find yourself back at the drawing board. This is because angel investors aren’t venture capitalists – they often have a much lower limit in terms of how much they can invest. So be mindful that an angel investor’s funding will only get you so far!
3. Lack of Regulation
While angel investment certainly offers more freedom than traditional investment structures including bank loans and government grants, it’s also true that dealing with angel investors may have less regulatory oversight. This can pose risks for both parties if expectations aren’t clearly defined. So it’s really important that you do your due diligence on your angel investor to make sure they’re the right fit for your company, and thoroughly discuss any expectations that you or your angel investor might have.
Conclusion
Angel investors can be crucial in getting small businesses off the ground. They can provide financial support, expertise and mentorship, and excellent networking opportunities, all of which can make a business bigger and more profitable. However, it’s also worth bearing in mind that angel investments aren’t regulated as stringently as more traditional funding methods, and you might find yourself limited by your angel investor’s funding capacity or expectations. So it’s really important to make sure that you do plenty of research and have thorough conversations with any potential angel sponsors to make sure that you’re both on the same page.
If you’re wondering where to find angel investors in the UK, the UK Angel Investment Network is a great place to start. And if you’re just looking to meet some like-minded individuals who might be able to connect you with the right people, consider joining the Impact Brixton community! Our coworking space in London is home to hundreds of creative entrepreneurs, with experience in gaining funding from a wide variety of sources. It’s the perfect place to start.
