Starting any business naturally involves cost but attracting funding to get it off the ground can be challenging. An angel investor could be the answer.
From start up costs opens in new window, equipment, operations, and staff to grow your business opens in new window, costs can mount up, but knowing the type of funding that is best for your business can be challenging, as well as accessing the financing you need.
Angel investment has overtaken crowdfunding as the second most common investor type in the UK equity market.
Despite a drop in investments in 2022, angel investment is the least affected by market conditions.
This guide outlines some of the benefits and potential drawbacks of an angel investor, but always seek independent and specialist financial advice when looking to obtain investment in your start-up, as individual circumstances will vary.
What is an angel investor?
An angel investor is an investor that offers financial backing to a business, typically a start-up or early-stage business, in exchange for a percentage of the company.
The investment is offered either as a one-off capital injection or can be ongoing support through the early years.
Angel investors can work independently or as part of a syndicate.
Individual angel investors usually invest their money and may work directly with the organisation to help grow the business.
With syndicates, a small group of angel investors with diverse expertise invest together, usually under a lead angel’s guidance.
Read our guide on how to get more investment to grow your business opens in new window.
What are angel investors looking for?
Angel investors look for start-ups that offer a strong potential for growth and will produce high returns on investment (ROI).
The precise ROI rate is subject to the individual angel investor and the nature of the business deal, but usually, angel investors expect to see a 30-40% opens in new window ROI over a three to ten-year period.
Since angel investors invest their own money, they often undergo extensive research and due diligence to ensure their investment is worthwhile.
As such, angel investors typically look for a start-up with the following:
- motivated, knowledgeable, and reliable founders
- a robust and thorough business plan opens in new window
- some existing traction
- strong market potential opens in new window
- high potential for scalability opens in new window
- a unique selling point (USP) that puts it ahead of any competition
- an exit strategy, such as an acquisition.
Read our guide on ten ways to create a winning start-up pitch opens in new window.
Why choose to work with an angel investor
Angel investor funding can open doors for start-up businesses early on that can allow them to:
- purchase premises opens in new window
- acquire inventory
- hire employees
- pay for operational costs
- pay for marketing materials, such as a website opens in new window or social media content opens in new window.
Read our guide on six ways to boost your website’s SEO opens in new window.
Funding from angel investors may be more flexible than if a business acquires more traditionally sourced financing, such as from a bank opens in new window.
Agreement terms between angel investors and businesses can be flexible as the investor is investing their own money and, therefore, can negotiate terms that work for them and the company they are investing in.
As a new business, meeting the criteria for a loan can be challenging as your start-up’s credit history opens in new window may be limited, and your business may not have the trading history to qualify for funding.
Angel investors choose a business to invest in and may be more willing to take on the risk of investing in a company that the angel investor considers has potential.
No monthly repayments
Although each agreement between a business and an investor will have its own terms, angel investors often exchange their funding for shares in the business, meaning, unlike a business loan, you won’t have monthly loan repayments to meet.
Bank loans often require security opens in new window against the loan in case you cannot make repayments, but angel investors are investing in your business in exchange for shares, therefore taking the risk in the business’s success.
Angel investors typically have business experience meaning they can share their knowledge opens in new window to help your business succeed.
Angel investors will often have contacts with experts from various industries.
Some of the ways start-up owners can benefit from this are:
- angel investors could put business owners in touch with experts to gain advice or learn any essential skills
- they could introduce customers to the business and set the foundations for stable client-to-customer relationships
- they could use their connections to allow business owners to get access to B2B (business to business) discounts or deals.
What are the drawbacks of using angel investment?
Although angel investors come with many advantages, it’s wise for start-ups to consider some of the drawbacks of working with an angel investor, such as:
Lack of control
An angel investor takes shares in your business in exchange for their investment, meaning you don’t have complete control of your business.
Consider that an angel investor could have a say on decisions that you may have taken on your own previously such as:
- the business’s brand opens in new window
- the distribution of company funds
- the location and style of the premises
- the type of products or services stocked.
Pressure to produce fast results
Having an angel investor looking for a return on their investment can increase the pressure on your business to produce fast results and set revenue or growth targets, which can add pressure.
Investors may expect to receive regular reporting and constant updates, which can be time-consuming for start-up owners focusing on growing the business.
If there are too many disagreements between the angel investor and the business leaders, a conflict of interest between the start-up team and the investor could arise.
This could have many ramifications for the business and potentially cause it to fail, with the angel investor pulling their funds or ceasing further investment.
Read our guide on what makes a business successful opens in new window.
How to find an angel investor
There are several ways to locate an angel investor, such as:
Attend networking events
Networking events allow you to present your business plan to potential angel investors.
The UK Business Angels Association Summit opens in new window is one way to put your business in front of potential investors.
Visit online platforms
Online platforms, such as the Angel Investment Network opens in new window, are designed to connect businesses with potential angel investors.
LinkedIn opens in new window is designed as a business network and is another way to establish connections with possible investors.
Alternatives to angel investment
Angel investment may not be the right choice for every business, and there are some alternatives to this.
Other investment opportunities include:
- apply for a bank loan: providing you have a good credit score and sufficient capital, you can apply for a bank loan
- apply for a Start Up Loan: Start Up Loans opens in new window offer new small business funding of up to £25,000 opens in new window, plus a year’s free mentoring to support you as you embark on your business venture.
Want to learn how to manage your start-up’s finances? Check out our free online courses in partnership with the Open University on being an entrepreneur.
Our free Learn with Start Up Loans courses opens in new window include:
- Introduction to bookkeeping and accounting opens in new window
- Financial accounting and reporting opens in new window
- Financial methods in environmental decisions opens in new window
Plus free courses on finance and accounting, project management, and leadership.
Reference to any organisation, business and event on this page does not constitute an endorsement or recommendation from the British Business Bank or the UK Government. Whilst we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.