There are many alternative ways of raising capital to fund business growth. UK Women talks to Dorset Business Angels to find out exactly what how Angel Investing works:
What is an Angel Investor?
This is an individual who has taken the decision to invest their own money into a business by taking an equity stake in an early stage business. Like any other investor, their aim is to secure a good return for supplying the business with the seed capital it needs to launch its product or service. Angel investment carries a high degree risk; investment has to be for a minimum of three years to obtain EIS/SEIS relief. For a shrewd ‘Angel’, the reward can be a substantial multiple of his/her initial stake.
A typical investor will fall into one of two categories, as required by the Financial Services Authority, (FCA). These are High Net Worth Investors and Sophisticated Investors.
High Net Worth Investors
A High Net Worth Investor is an individual where at least one of the following applies: during the financial year immediately preceding the date you self-certify, your annual income is £100,000 or more; throughout the financial year immediately preceding the date you self-certify, your net assets value £250,000 or more (excludes certain types of assets).
As a Sophisticated Investor you are a member of a network or syndicate of business angels for a minimum of six months before self-certifying; you have made more than one investment in an unlisted company in the two years before the date you self-certify;
- you have worked in the two years before the date you self-certify in a professional
- capacity in the private equity sector, or in providing finance for small and medium enterprises; you
- are currently, or have been in the two years before the date you self-certify, a director of a company
- with an annual turnover of at least £1 million.
How Can People Find Angel Investors?
If you are looking for funding, the most important thing to consider is whether you’re looking for money and expertise into your business or just money. If you just want money, it might be useful to do a crowdfunding round as well. You should avoid paying too much at the front end, but you can pay money to a network or group who will give you some investment readiness. Most angel investors tend to take a success fee at the end. Lots of people don’t take any money at the front end at all; it’s all about the return.
Thoughts for Pitchers
When approaching a group of investors, do sufficient due diligence on the group – you want smart, good money. A good ‘Angel’ will want to come on your board and work with you. Usually, you will obtain good advice, plus many new contacts from such an arrangement. Investors are on board primarily to give you the benefit of their experience and help you take the business to the next level, but ultimately, they will be focussed on securing an exit at a point where they can realise a substantial gain on their initial investment. One important fact to remember is that 58 per cent of all ‘Angel’ deals are likely to end in failure, according to the UK Business Angels Association.
Incentives for Investors
The government gives Business Angels generous tax breaks to mitigate against the high risk involved. Your essential tool kit should include the method of approach you will take when approaching a particular group of investors. Think about the subject of investing from their – the Angels –point of view. For example: –
Will your product disrupt the existing marketplace that you intend to operate in.
Does your business have a strong management team who have previous experience in your product/service and who have invested their own money in the business.
- Is your product/service highly scalable and are your forecasts both realistic and achievable when
- compared to the amount of investment you are seeking.
- Do you have strong IPR.
- Is your product patentable.
- Is the valuation of your company realistic.
- Are you registered for EIS/SEIS.
If you can answer ‘yes’ to all or most of these pre-requisites, then your chances of obtaining ‘Angel money’ will escalate rapidly.
Angel money will co-invest along with many other capital raising sources such as crowdfunding, Venture Capital (VC) finance, debt and asset finance. It is part of an investment cycle that can contribute to the further growth of many start-up or early revenue enterprises. Angels have also started to co-invest with each other – they build syndicates – and this allows them to put significant amounts of money into a new business.
There’s around £1bn angel money going into the start-up market a year, compared to around £300m from the VC end. The angel market has always been a significant; today its extremely dynamic in its approach to raising new capital – there are about 20,000 investors in the country at the moment.
Dorset Business Angels is part of the UK Business Angels Association, (UKBAA) which includes all the above types of investment organisations in its membership, so it is a fantastic source of information and a great resource. For more information on investing or looking for investment visit their website: dorsetbusinessangels.co.uk.