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You have a great idea for a business, you’ve done your research and you’ve identified a gap in your chosen market. But before you can start trading, you need the startup capital to make your dream a reality. Or maybe your business is already up and running and you need an injection of capital to pay for the necessary infrastructure for growth.
There are numerous ways of raising funds for your business, from business loans to crowdfunding. Each has its own set of benefits and caveats. There are, however, individuals that may be willing to make an investment in your business without the expectation of repayment and interest that come with a loan.
These are known as angel investors and they may be able to make a contribution to your business at far more favourable terms than a bank could. We look at who they are, what they can offer your business and where to find them.
What are angel investors?
Angel investors, also known as venture capitalists or business angels, are individuals who want to invest their personal wealth in promising businesses. These are often individuals with a high net worth, although sometimes they may include friends and family members who believe in your business.
The terms an angel investor offers will typically be very different to those proposed by business lenders.
What is angel financing and what are the benefits?
When an angel investor pledges funds to a business to support its startup or growth, this is known as angel financing. The terms of angel financing depend on the individual investor, however, terms are often very different to those of a loan. Angel financing may consist of a one-off payment or ongoing financial support.
As well as providing capital, these investors may also provide useful insight to help grow the business more efficiently and avoid the common financial issues that beset small businesses.
What do angel investors get in return?
Angel investors will not usually expect interest to be payable on the principal advanced to them, and in many cases, angel investors will not require the principal to be paid back at all. Instead of direct remuneration, they may expect to be granted a stake in your company. As well as requiring a percentage of your ongoing profits, they may also require a seat on the company’s board and a say in future decisions.
Angel financing pros
An angel investor may be able to provide the funding you need to grow your business at terms that are more favourable than other forms of business financing.
For instance:
- Interest is usually not payable on the principal sum, which is especially beneficial in times of interest rate rises
- In many cases, the principal does not need to be paid back at all
- Angel investment may be less risky than more conventional funding and more conducive to healthy cash-flow in your precarious early years
- Business angels are often highly experienced business owners who can provide invaluable advice and guidance
- The backing of a business angel can lend credibility and prestige to your brand, especially if the angel investor is an expert in your chosen field
- Business angels also tend to have extensive networks of contacts that could be valuable to your business such as potential suppliers, service providers and leads
Angel financing considerations
Investment from a business angel could be just what your business is looking for. However, you should enter into any agreement with a venture capitalist with a clear understanding of their expectations and what they might mean for your company going forward.
Like any form of financing, business angels have their caveats. For instance:
- Angel investors are likely to expect a say in any future decisions your business makes. This may clash with your own plans and priorities.
- Another voice in the boardroom, especially one with its own agenda, may slow down business decision-making and compromise your company’s agility.
- They are likely to expect a share in future profits that may impinge on cash flow for longer than a commercial loan might.
- It can take a long time to find an angel investor, and even longer to win them over.
- The amount they are prepared to offer may be substantially less than a bank or dedicated business lender. Typically business angels will invest a maximum of 10% of their portfolio (anywhere between £20,000 and £125,000 on average).
How to find angel investors
Potentially, a business angel is a neat solution to all of your business problems. They can provide you with the funding your company needs to grow, while also helping you to better navigate the dos and don’ts of small business finance. But how do you go about finding a business angel? And how can you make an effective pitch once you’ve found one?
The good news is that there are several ways to find prospective investors.
- Attend networking events and industry-specific gatherings. These are excellent places to meet knowledgeable and experienced people who are already successful in your chosen field and looking for new opportunities.
- Visit websites that are dedicated to helping angel investors and business owners find each other such as AngelList, Angel Investment Network or Crunchbase.
- Put yourself out there. Write thought leadership content and post it on LinkedIn, go on business podcasts and take speaking engagements. You never know whose interest you may pique.
- Don’t underestimate the value of your own network. You may already know someone who either is or knows someone who is a prospective angel investor.
What do angel investors look for?
Knowing how to get investors for your startup is about understanding what business angels are looking for, and how to allay any fears or concerns that may cause them to hesitate. Remember that they are investing their personal wealth in your business and are likely to be fairly risk-averse because of this. The better you understand their expectations and anxieties, the better equipped you will be to pitch to them.
Investors may be looking for:
- A particular field or niche – food and beverage, tech, software and fintech are all popular growth markets where angel investors are keen to grow their wealth
- A business owner who has already proven themselves to be knowledgeable or authoritative in their field (so make sure your online presence reflects this)
- Detailed and realistic financial forecasting
- Potential share values and ROI
- A clear focus on ethics and sustainability in your operations
What to look for in an angel investor
Finally, angel investors get a lot of pitches from small business owners and budding entrepreneurs. They will likely screen applications for investment based on the criteria above. However, you should also screen prospective investors to ensure that you’re not wasting either your time or theirs by pitching to someone who would not be a good fit for your company.
When looking at prospective investors you should consider:
- Do they have experience in, or a working understanding of, your industry?
- Are they based in or near your location and have an understanding of your local market?
- Do they have other skills (legal, financial, technological etc.) that could benefit your business?
- Do they have a network of individuals or companies that service your chosen field such as suppliers, or service providers?
- Do they have a proven track record of successful investment in your field and beyond?
Once you have found your ideal prospective investor, Square’s robust reporting capabilities can provide you with easy access to the compelling data you need to make your case to them. With highly granular analytics, you can show them that their investment is safe in your hands.
