Understanding business angels and angel investment
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Posted: Thu 7th Dec 2023
Business angels are a source of equity finance, which means that they invest their own money, usually in return for a stake in your business.
They can be a good way to raise finance for your small business in London. But you'll need a convincing proposal to secure a deal that works for you and the investors.
In this blog, we explore what business angels look for in a potential investment. We also provide tips on how you can approach angels to boost your chances of success – but keep in mind that angel investment is not available if you're a sole trader or partnership.
What is a business angel?
Business angels are individuals with a high net worth, or groups of private investors, looking for opportunities to invest their own money.
Securing investment from business angels is one way of injecting capital into your company if you can't raise it yourself or through conventional loans.
They will often support your business during the start-up or growth phase. You might also be able to tap into your angel's commercial experience and network of contacts – and typically, business angels may have owned a business like yours in the past.
How much do business angels invest?
A solo business angel invests between £10,000 and £500,000 in your business. But investments of more than £2 million by angel syndicates are becoming more common.
The amount of equity that angels receive in return for their initial investment varies widely. It's typically between around 10% and 25% but it can be as much as 40% or more.
Angel investment is most suitable if your business has growth potential, and you're willing to give up part ownership in return for investment.
Listen to our Small Business Sessions podcast, in which Jenny Tooth, CEO of the UK Business Angels Association, discusses the ins and outs of finding and working with an angel investor:
What do angels expect from your business?
Since angels invest their money invest their money in exchange for equity (a stake) in your business, you won't need to make loan repayments to a bank or other financial institution – angels are looking for a return on their investment through your company's success.
Two key priorities for a business angel
Return on their investment
By taking an equity stake in your business, angel investors are looking for a healthy return. The exact rate of return they expect will depend very much on the angel, the nature of the industry and the initial size of your business.
In typical cases, an angel investor is likely to expect around 30% to 40% annual return on investment over three to 10 years.
Management involvement
If they choose to invest, business angels often ask to have some involvement in running your business, usually at board level.
They want to get involved because of their own valuable experience in a similar business or industry – not because they distrust your abilities. An angel's commercial insight may be exactly what your business needs to take that next step.
How can I find a business angel?
Networks are the best way to find your next angel – and there are several different ways to go about finding an angel:
Connect with investors through the Angel Investment Network.
Become a subscriber or member of the UK Business Angels Association (UKBAA) to access a directory of organisations specialising in early-stage funding and support.
Attend local and national networking events where you can meet potential angel investors.
Ask your business adviser, bank, solicitor or accountant if they have any contacts who might be interested in investing.
Before reaching out to a business angel, make sure you check if they've self-certified as a "high net worth individual" or "sophisticated investor".
Approaching angels
When approaching your business angel, you should have your business plan available, as well as some other key documents:
Balance sheet and cash-flow forecast.
Any existing shareholder agreement.
The first meeting is crucial. It's a chance for the angel to evaluate not only your business, but also how you present yourself and how you react to feedback.
This is your chance to demonstrate that you and your management team are clear thinkers with strong organisational skills.
What angels need to see from you
Your business is sustainable over time.
You can achieve significant growth.
You have a solid plan to achieve success.
You're happy to sell shares and give up a degree of control over your business.
How much money you're seeking – and how you plan to use it.
It's a good idea to seek professional advice from a business adviser, lawyer or accountant.
Remember to carry out due diligence on your potential investor. Ask about their previous track record as a business angel and their expertise. This will help you decide if they're a good fit.
It's also important to discuss what will happen at the end of the investment period. Who will buy the investor's stake if they decide to sell it? What will happen if things go wrong and the value of their investment falls? Make sure this is clear before you decide whether a particular angel investor is right for you.
Other sources of funding
If business angels aren't right for your business, you can also learn about crowdfunding – where you ask a large number of people to invest in your business in exchange for a small stake. You can also go through this equity crowdfunding checklist to avoid any common pitfalls.
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Disclaimer: This information is meant as a starting point only. While we've made all reasonable efforts, we make no warranties that the information is accurate and up-to-date and we won't be responsible for any errors or omissions in the information or any consequences of any errors or omissions. You should seek professional advice where appropriate.