Sourcing funding can be a complex and time-consuming process. In addition to finding the most relevant routes for finance, you need to assess them for affordability, suitability for the business, risk and likelihood of success. However, you also need to consider whether there are any added benefits, over and above the cash injection.
They may be able to offer the funding, but would additional knowledge be a good thing? Perhaps it’s worth considering someone who is more invested in your company than just supplying the financial backing.
Welcome business angels. A more personal form of equity funding, angel investors provide financial investment in return for a share in your business.
So how do they differ from other investors?
Firstly, they ask for something in return. As a form of equity finance, you will give up equity or shares in your business as an exchange for funds. But they are more than just a money tree. Unlike other investors, angel investors can offer invaluable, first-hand experience of small businesses or a specific sector. Not only do they have the knowledge to help your business grow, but they can often provide a network of contacts to enable your business to grow faster. With a vested interest in your business, they are more likely to work with you to make your business successful.
With around 18,000 angel investors in the UK, it is estimated that £1.5bn is invested every year in early-stage businesses. This is more than three times the amount invested by venture capitalists. However, it is difficult to directly compare angel investing to other forms of financing because expert advice and industry contacts don’t have a monetary value.
Banks generally have a complex process in order to secure funding, whilst most venture capital firms are not interested in financing such a small amount, business angels will often facilitate a high-risk investment where the potential for an excellent return is clear. Angels often invest between £10,000 and £500,000 in a single venture or can provide up to £2 million in a syndicate. Using their own money – whether it be personal capital or business fund – angel investment often offers a quick route to funding as there are fewer signatures to get or steps to go through.
The good news is that there is already an established network of angel investors out there who are willing to spend their money. Business angels are usually wealthy individuals, so if your family member or next-door neighbour has a few hundred thousand lying around, they might be interested in investing in your business. If not, there are a number of angel networking organisations, such as UK Business Angels Association, who provide a pick of angels.
As with any business, an exit strategy needs to be planned for at the start. Even if the business angel hasn’t set a specific period for a return on their investment (which can range from three to eight years), they will still want the option of an exit to be readily available. The most common exit strategy is repurchasing the angel’s shares either through the company or by another investor. And, as with other investors, angel investors will want their money back eventually. Whether this be a sizeable share of the profit or one lump sum, it could be nearly three times the cost of their initial investment.
So if you are looking for support and guidance, in addition to funding, angel investors could be the ideal solution. But remember, with a stake in your business they want hands-on involvement in the management of their investment – if you don’t want to give away any ownership in the business you worked hard to build, then it’s probably not for you.
If you want to discuss in more detail if angel investors can provide the ideal solution, give us a call on 0203 327 0567 or email [email protected].