By George Whitehead, chairman of the government-backed Angel CoFund
Research and commentators tell us that the UK is the home of the high-growth business. In November 2014, Sherry Coutu’s ‘Scale Up Report’ marked a turning point in discussions, moving us away from ‘start-ups’ and towards ‘scale ups’ – asking what can policy-makers and heads of business do to best support British scale-ups.
One of Sherry’s key recommendations is around support for financing scale-ups. Raising investment is a crucial element of building and growing a business, but for many it remains a tricky process.
As an early stage business looking at scale, it is likely that angel investors, angel syndicates and high-net worth individuals making personal investments, will play an important role in initial fundraising rounds. Typical amounts to be invested by angel investors fall between £5000 and £150,000 in a single venture – dependent upon the business and its growth needs. An angel investment is what usually takes a start-up from the idea stage to a tangible business.
Angel investing: an introduction
An angel investor is an individual with personal wealth looking to use this to invest directly into private companies. Whilst some angel investing happens under the radar in the UK, as groups of friends or family members invest in businesses known to them, many angels take part in formal syndicated angel groups and business angel networks, in which they can combine their investment with others, to give the overall round more clout. A key advantage to having an angel invest in your business is that they will often include their skill-set as part of the deal, adding value that you wouldn’t necessarily get with other types of investment.
The UK has a very active business angel scene. It’s estimated by the UK Business Angels Association (UKBAA) that there are about 18,000 business angels active in the UK. They also estimated that around £850m is invested by business angels each year which is over double the amount invested by venture capitalists. This highlights a positive trend of individuals succeeding in business themselves and then re-investing this new found wealth into other new businesses thus creating a self-fulfilling, organic investment cycle within the entrepreneurial community.
Business angels may also have a range of motives for investing in a business, not just the potential financial gains that a venture capital or corporate venture investor is looking for. Financial success will always be an element when an investment opportunity is considered by an angel but other factors may play a role, such as social impact of the business.
What sorts of businesses do angels look to invest in / how to streamline your investment strategy
Businesses that operate within a sector of interest to the angel, professionally or personally, are more likely to curry favour. An aspect of altruism may also be appealing. Therefore a range of elements should be considered when approaching angel investors. Target angels whose background or interests marry well with the investment proposition as they are more likely to invest and will have more to contribute moving forward in terms of skills and knowledge.
The strength of the team behind the investment opportunity will also be a key consideration for a business angel. In an early stage business the quality of the team is crucial, and may even be a bigger draw for investors than the financials or five year plans. Great founders attract great talent and this ability to draw a world-class team will be a consideration.
Many entrepreneurs will first use personal and friends and family investment before seeking outside capital. But how does one then go about finding and approaching angel investors? Networking through industry events and awards are great ways to start opening doors. Angel investors receive a large numbers of investment proposals and a very small percentage of those that come from entrepreneurs they’ve never met will result in investment.
Tax incentives are also worth researching when looking for angel investment: the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Schemes (SEIS) are important ways of de-risking investment and are great tools available to entrepreneurs looking to fundraise. Your angel investor should know all about these, but do your research to demonstrate your knowledge of the space to any potential investors.
Strength in numbers
The old adage ‘strength in numbers’ is one that definitely applies to angel investors. Once you have an investor on board, encourage them to approach angel syndicate groups. The greater the number of investors then the greater the chance of raising a larger investment, which will ultimately help your business go further. What’s more, the pot of knowledge and skills provided by the business angels from which you can delve will also be greater.
How you manage relationships with your investors is an important consideration going forward. Further funding may be needed down the line and so a transparent communication about plans for the business and its needs are crucial.
Another option business angels may benefit from is approaching the Angel CoFund. At the Angel CoFund we co-invest alongside business angel syndicate groups, adding to funding rounds and, as such, extending the runway of their investment.
Keeping your investors happy
Positive relationships with investors moving forward can have more than just financial benefits. If an investor enjoys working with the company they are more likely to become an advocate of the brand, and then to promote and recommend out of choice. Again this will benefit the business in terms of future investments as well as potential consumer acquisition.
With government initiatives such as EIS, SEIS, the British Business Bank, the Angel CoFund etc. now is a great time, as a scale up business, to be seeking angel investment. An angel investor is looking for a good idea, a strong business model, solid financials but most of all a leader or team with the belief and tenacity to take an idea as far as it can go.