One of the more popular ways to raise capital is utilising angel investors, with this type of funding raising an estimated £850m last year in the UK, according to stats issued by the UK Business Angels Association (UKBAA).
Business Leader Magazine looks into angel investing and what trends are shaping this market.
What makes an angel investor?
An angel investor is someone who puts their own finance into the growth of a small business at an early stage, also potentially contributing their advice and business experience.
Angel investors might be wealthy, well-connected and have an experience within business, to bring not only finance to help the business grow, but also to draw on their own experience, contacts and links to help the company achieve success post investment, orthey could be individuals who have decided to put money in with little-to-no experience.
In return for investment, angel investors would normally take shares in the business in return for providing equity finance.
Angel investors seek to share in the successful growth and have a return on their investment, however, angel investing is generally regarded as “patient capital” meaning investors may or may not see an exit or a return for up to 8-10 years.
Peter Cowley is chairman of Invested Investor with over 40 years’ experience as an entrepreneur, he explains: “I’ve invested in 65 companies, in which 54 are still alive and I’ve had five positive exists, but it takes time.
“I’ve always said that after 10-15 years if I can get back all my capital back plus £1, that would make me really happy. It’s the journey I enjoy.
“I started as an angel investor by chance. I was mentoring a guy that had done the same course at University as I had previously, he wanted to start a business, so I put some money into it. Not a large amount, but enough, we built and sold it, less than three years later, and I received a return of more than 17 times its value. It was during that journey when I started to become an angel investor.”
Angel investing is risky and market research compiled by UKBAA has shown that 58% of angel deals may not return the original stake money. However, there are ways of mitigating your risks through developing a diversified portfolio of investments and taking reasonable steps to carry out due diligence, also developing your own skills and understanding of the angel investing process, also actively supporting your investee businesses post investment.
With more and more investors getting involved in angel investing as it becomes an increasingly popular way to gain investment, Cowley outlines the risks involved.
He said: “As an angel investor you need to have an amount of wealth which you can allocate and don’t mind losing. It’s high-risk so you must not invest more than you can afford.
“Whoever gets involved in angel investing must get comfortable with their own risk appetite. For a decent return in my sector, which is deep science and tech, you’re looking at over 10 years. You’ve got to be very patient.”
Angel investment vs venture capital
Angel investors take a different approach from that of other investment types including venture capital funds, not just in the size of investment but also the way funding is handled, with angel investors happy to sit back and not see a rapid investment return, with exit plans set out over a long-term timescale.
Angel investors can be as hands-on or hands-off as they see fit. They will have equity in a business but will not always have a seat on the board – unlike venture capital investment.
Differences also include the fact that angel investors make their own decisions about investments they make, plus engage directly in the businesses which are chose to be funded.
Venture capital funding differs to this with whole firms involved unlike individual investors. Therefore, usually involved in the decision-making process will be investors, board members, and people whose job is to generally help your business develop. Venture capital firms are made of professional investors, and their money comes from a variety of sources – corporations and individuals, private and public pension funds; and foundations.
Unlike venture capital funding, which takes a look at companies which are typically far down the road in their journey, angel investing actually can take place in the embryonic stages of a business’s growth.
Cowley, himself, would rather be involved in the business at an early stage, noting that he’d rather ‘share the journey’ and see an individual within the business grow into the venture.
He added: “Obviously, there needs to be an idea there and a plan of how to fund it in some way, instead of relying on shareholders to monetise it. However, I do look at good people when funding. This is crucial.
“Good people and a poor idea has a chance to succeed whereas the other way around more than likely won’t. It all comes down to you investing in the people and their skills to execute the ideas. I invest very early on, whether the company has been setup or not, I’m usually on board by that time if I’m interested. You have to join their dream and share the vision early on and then help them on the journey to creating success.
“But you’re not just looking at the leader, you’re looking at the team. I very rarely invest in a single founder, so it’s a team of two or three, but very rarely one, and co-CEO scenarios don’t work.
“In many cases what you’re presented with at the beginning isn’t what the business turns into. The word pivot is used a lot and most, if not all, businesses pivot, and aren’t anything like when they started.
“I always tell people when I invest in businesses that no one should assume that they’ll be the CEO or leader of a company over the whole of the journey. You have to grow with the business or grow faster than the business otherwise you will be replaced.”
While a monetary result is obviously the gain, many angel investors look to the ride, the ups and down, trials and tribulations, which make angel investing worth it.
Cowley explains: It’s the development of the people, like a teacher or a coach, that I enjoy. it’s seeing people grow and being able to become CEO’s and chairman of businesses they’ve started out.
“I’m not driven by monetary result, now that isn’t the case of all angels, certainly the ones who are less active, they’re driven by the bottom line. Of course, I do look for, after 10-15 years, all my capital back plus £1, that would make me really happy. It’s the journey I enjoy.”
As with any funding avenue it’s always a good idea to do research and ensure that the choice made is the right one for each individual business.
At the end of the day, the choice of where to gain investment is about ensuring the business is being built effectively to deliver the most value for the stakeholders involved.