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For entrepreneurs, the search for funding can feel like a never-ending pursuit, but angel investors are the answer to a large majority of very early-stage businesses seeking investment! Although business angels can be an excellent source of capital, still, you'll need grit, determination and a winning proposal to secure a deal that works for both parties.
Angel investors are so-called because they are frequently viewed as saviours of businesses struggling to secure funding. They typically invest early when a company is too small to attract venture capitalists but has high growth potential. Angel investment is usually the first round of independent external investment. Angels typically invest in early-stage ventures where the founding team has exhausted their personal savings and family and friends for funding and they need a larger injection of capital to grow.
How much do Angel investors invest?
Angel Investors are individuals who invest their own money in early-stage companies. They are the invaluable lifeblood source of funding for aspiring entrepreneurs and early-stage businesses. There are over approximate 18,000 registered Angel Investors in the UK with the UK Business Angels Association (UKBAA), and collectively they deploy over £2bn each year across approximately 4,000 businesses via the (S)EIS scheme.
Angels come in many forms; they could be individuals with some capital behind them who may provide investments from around £5,000 to £50,000 each time. Some may make investments of £100,000, whilst others may provide significantly more. Formal distinctions used are certified high net worth individual with income over £100,000 and assets over £250,000. Then there are ultra-high net worth individuals (UHNWI) with assets more than approximately £25m.
There are some significant benefits of working with an angel investor:
- They can provide valuable advice and mentorship
- They may have valuable, hard to access contacts
- They invest their own money, so are more flexible
- They may play an active or passive role
- They may have different motivations
- They are often called patient capital
It seems, Angel investors are a major source of funding for early-stage startups
The UKBAA 2020 Angel market report states there are over 18,000 Angel investors in the UK alone, so they are a major source of funding to benefit from.
As angels are individuals who invest their own capital into businesses they can come from any industry or background, but they are just individuals who have the capital they are willing to invest into high-risk startups and accept the chance that it may all be lost given startups are so high risk.
They may join a specific angel group/network to get their deal flow, compare notes and work among other Angels to pool their funds, knowledge, and expertise, and sometimes they may partner to form a "syndicate" when investing, so they find specific deals they all like as a group to make the round more significant.
Angel Investors are also advisors
Angel investors usually have successful experience in business or entrepreneurship and have a strong understanding of what it takes to start, run, scale or exit a business. They can act as advisors to the founders of the startups they invest in for those difficult early stages. It can be a significant help if you're a first-time founder trying to grow a business from scratch.
They understand that excellent ideas are worthless unless you turn them into a product or service that customers love. They provide vital seed capital, helping entrepreneurs launch their projects and get them off the ground.
“The idea is that angel investors are supposed to be wealthy people supporting people who need funds, typically who are not wealthy, and don't have the ability to do it themselves.” - Jason Calacanis, Entrepreneur, Angel Investor, and Author
The different types of angel investors are listed below:
The Various Types Of Angel Investors for early stage start-ups
The Family Angel Investor
The Family Investor is a supportive family member who "knows you," rather than a traditional Angel Investor. Their motivation stems from a desire to help a family member or friend. Their fundamental investment thesis is that they believe in you. Because the investment is so emotional and personal there is a tightrope to walk if taking money from them is the right long term decision.
The Niche-specific Angel Investor
They will be well-versed in the industry in which your company operates. This is the best type of Angel Investor in some ways because this person can help to validate your idea to some extent. Their investment is based on their knowledge of your industry and business type, and there is little emotion present in their decision making to offering funding. If you can get them on board, they can help you find strategic partners and give you valuable advice to help avoid common issues at the early stage and should be able to accelerator your progress.
The Serial Angel investors
They are professional investors who invest in a wide range of businesses. Bringing on this type of investor can help your business in many ways. It may result in additional introductions and investments from their network. Although, with so many investments, they may be unable to provide specific advice to your niche, but their real value comes from providing sound general advice on the startup's strategy and operations from seeing a vast range of issues accross other businesses that have both succeeded and failed.
The Founder Angel Investors
They are fellow startup founders who are motivated to invest because they want to assist other entrepreneurs in succeeding as they have lived in the tranches of startup world themselves and come through the other side with some success. They can now play a role to directly support you with their knowledge and experience and will hope to make some money in the process by turbo charging your success. Maybe one day these individuals may make enough investments to qualify as super angels as they are so passionate to support fellow founders. The truth is, their motivation may not be purely financial, but rather philanthropic.
The Wealthy and Bored Angel Investors
These could be successful professionals, such as retirees, doctors, lawyers, and dentists, etc as well as established business owners. They're most likely wealthy and maybe bored with their day job and possibly looking for something exciting, so look to the opportunity to make money by investing in startups. They can provide the funding, but they may struggle to add value to your company that other Angels can.
Many other motives for Angel Investors who invest in early-stage startups
Although we group types together, there is no doubt, there will be many other types of Angel investors that we haven’t covered on our list. We’ve named a few common types, their motives and their value. It's fascinating to learn about the various common types of Angel investors and their motivations. Some want to be active and truly support the founders, while others simply want a return on investment.
Ideally seek 10x in value than the cash they invest
There is an opportunity to find 10 times the value from an Angels connections, experiences and mentorship than purely the cash they invest. The key question to ask yourself is what has more value, a £10,000 investment, or access to some of the key strategic connections you may never get in front of? Knowing this and that Angels come in many shapes and forms will now help you make a more informed decision before you start your search for your perfect Angel investor!
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