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Understanding Angel investment

Angel investment is generally the first piece of equity or risk capital that you would consider when you are in the early stages of growing your business. Angel investors are individuals who use their own money, often a small portion of their personal spare finance, to back entrepreneurs at a very early stage.

Why is Angel investment important?

Angel investment is  important because it gives you that first external capital you might need to move your business to the next level. Not only this, Angel investors come from a range of entrepreneurial, business or professional backgrounds. This means they bring extensive business and industry experience, strategic insight, introductions, connections, advice and help with all kinds of areas of your business.  This can really add value alongside the money that you may receive from the angel.  

How does angel investment work?

Angel investors take shares in your business in return for giving you risk capital. Angels would generally only take a minority stake, generally between 5 and 25% maximum shares in your business. Never consider investment from a business Angel who suggests taking more than 30% – you need to keep control of your business and have the incentive to build and grow it.

When should you consider angel investment?

Normally, angel investment is most useful once you are past that early idea stage and have already started to test out your business model. You may have already developed a prototype, or you have what we would call a proof of concept. Most importantly, you already have a business, service, technology or  product that you can show and demonstrate how it might work.

Ideally you will have tested your proposition  with some potential customers – either direct customers, users or followers. You also need to be able to demonstrate the real need and interest for this in the market or target industry.

Top Tip: Make sure you have done your market research to understand your business niche or special unique selling proposition and show you can add real value to the market, sector or area of need.

Where does Angel investment fit in the supply chain of funding?

Angel investment comes after you’ve been through the early stages of testing your business – whether you used your own personal finances and time, and perhaps accessed a grant for research and development or a local enterprise grant. Angel money comes in when you’re ready to take on external investment when looking to build your team, expand your markets and customers and  build your growth strategy.

How is Angel investment different to venture capital?

Angel investment is the stage before you would consider  venture capital, when you might then be ready to further grow, build and scale your business. Angel investors often do not limit you to one round of funding. Generally, investors are prepared to give you further funding rounds, and provide support in accessing other forms of finance as well. An example of this could be helping position you for Series A investment when you’re ready to go into faster expansion mode and require more extensive levels of risk capital. Angel capital is sometimes called patient capital for that reason, in other words Angel investors are less likely to be pushing you towards an exit than VC funds, which typically have a fixed life of 7-10 years..

How much do Angels invest in a deal?

Individual angels normally invest between £5k and £50k in an individual investment. However, the majority of angels work in syndicates alongside a group of other likeminded angels. This allows them to pool their capital, share their risks, expertise and deal flow and bring their finance together to create a bigger amount of investment than from an individual.

This can make it much easier for you to access the level of finance and experience that you may be looking for instead of finding a whole group of different individual angels. Syndicates can invest anything between around £100K and up to £2million, depending on the capacity of the group of investors.

Top tip: You may want to raise more money than an individual Angel or syndicate can provide. So, it’s important to identify that you either need to bring together multiple investor groups, or a cocktail of grants, funds and angels to gather the amount of investment that you are looking for.

Take the next step: finding an Angel investor

About the author

Portrait of Jenny Tooth

Jenny Tooth OBE is an Angel investor and Chief Executive of the UK Business Angels Association, building the Angel community around the UK, connecting investors to deal flow and assisting entrepreneurs to attract investors. Jenny sits on the steering group for emerging technologies and innovations for Innovate UK. She is an experienced speaker on Angel investing and entrepreneurship in the UK and internationally.