Raising funding for your business is no easy feat, and even understanding the options available to you can be difficult, not to mention taxing on the brain and a drain on your time. As part of Money Month on The Right Stripes, we chatted to a number of funders offering loans, grants and investment schemes, to help you understand what they are, if they’re right for you, and what you need to do to apply; giving you insider tips.
This week we caught up with the UK Business Angels Association to find out about Angel Investing.
Can you explain what angel investing is, how it works and who uses it? What type of businesses secure funding using angel investors and typically who are angel investors?
Angel investing is equity finance. An Angel investor is a high net worth individual who makes use of their personal disposable finance and makes their own decision about making the investment.
The investor would normally take shares (an equity stake) in your business in return for providing equity finance (funds). In so doing, they normally seek to not only provide your business with money to grow, but also bring their experience and knowledge to help your company achieve success.
They can invest alone, or as part of a syndicate (a group of angels). Every angel investor has a different appetite for investment, and usually invests between £10,000 – £500,000. Deals of up to £2m are becoming more common, due to syndication.
Angel Investors seek to have a return on their investment over a period of 3-8 years. They therefore look to see if your business can fulfil certain criteria from the outset.
What sort of businesses can apply for angel investment?
Whereas any business can apply for angel investment, not all will be successful.
EIS / SEIS Eligibility
Angels receive considerable tax breaks from investing in businesses under the EIS and SEIS scheme. These schemes make your business more attractive to angel investors and UKBAA would advise you to check your eligibility online at HMRC before applying for angel funding.
Research shows the majority of angel investors would not invest in a business if it was not eligible under either of these schemes.
The strength of the management team and factors in the business model itself will also have considerable impact on the investor’s decision-making processes.
Below are a list of the top considerations identified by Angel investors when assessing a business for potential investment.
The Management Team
The people involved in a business have been shown to be a most significant aspect for Angel investors when deciding to make an investment. Namely, their experience, skills, drive, and how they come across. They will then of course look carefully at the business itself and the core aspects of the business plan.
Whereas not all businesses can satisfy each of these considerations, being able to ‘tick the box’ for 5 or more (from those below), can be a good place to start:
Solving a Problem – Does the product, technology or service address a real challenge in the market or society – what is the pain you are solving?
Disruptive – Is it likely to be disruptive and make a real impact in the marketplace or establish a new niche?
Protected – Does the product or technology have identifiable Intellectual Property? This may be patentable or may be in the form of copyright or branding or other intangibles – and can you confirm ownership?
Competitive – Do you have a defensible market position? What other businesses are in competition with this project? How does it compare and what is the unique selling point or advantage – or does have first mover advantage?
Revenue – How does your business make money? Are there clear identifiable revenue streams? Are there likely to be good gross/net margins?
Scalability – Do you have a scaleable business model? Are you able to achieve explosive growth?
Proven Model – What kind of validation have you had in the market place? Are you already selling or has this been tested out with potential customers? Can you show results of market testing/surveys?
Market – What is the market size? Can you achieve a realistic potential market share?
Tax Relief Opportunity – is the deal EIS/SEIS eligible and do you have advanced clearance (see below)?
Exit – Do you have a desire and strategy for exit?
And finally are you prepared to give up shares in return for investment and to have an investor on your board.
What is the process involved? What does one have to do to secure investment?
Create your Essential ToolKit
A concise business plan
A 3 page stand-alone Executive Summary
A power point deck
A practised pitch for delivery
TIPS: Make sure your pitch and executive summary take note of the top factors angels look for in a deal and ensure you are able to demonstrate an attractive investment proposal – clearly outlined in your business plan!
Along with 5 year financial projections and the growth you intend to achieve in that time, plus what impact angel investment would have on your business and why you need the investment.
Identify your Angel Investors
A great place to start is the UK Business Angels Association Membership Directory pages. Investors are searchable by size of investment required and region. Or you may choose to use an online Showcase platform such as Capital List, or the new GrowthShowcase platform!
You may then get invited to do a formalised powerpoint pitch or invited to a meeting. Be prepared to sell your business!
Due Diligence & Legal Process
Once angels have taken an interest in you. A Term Sheet sets up the basic parameters under which the investment will be made. This is a very import document
Remember that angels buying shares in your business is a legal transaction. So be sure to seek legal advice for associated documents such as the shareholders agreement.
Should you have an advisor to help you through the process? Is there a lot of preparation that needs to go into the application?
Finding an advisor is not an essential part to raising angel finance, but can be particularly useful if you and your team are having difficulties writing a coherent business plan.
It has been shown to be very beneficial to seek guidance in the form of a mentor, prior to seeking angel investment. This will be a person with experience in advising new businesses, who can really help streamline your business concept and increase the likelihood of gaining investment. Find a mentor through your personal contacts or even online on sites such as mentorsme.co.uk. Affordable guidance for your business can also be found from a variety of experienced providers in the UKBAA Members Database.
Accountants can be very helpful in drawing up your financial projections. If you do have an accountant, do ensure they are giving you help with applications for EIS/ SEIS.
The UKBAA member database lists advisors such as legal and accountancy firms who specifically work with angel investment deals!
Can you secure investment on an idea prior to launching, or does your company need to have already been formed and be operating and making a profit?
Pre-revenue, pre-profit and profit-generating businesses are all possible candidates for angel investment.
For pre-revenue businesses you need a proven concept – attracted customer interest, or proven the product ‘works’ and be able to demonstrate your businesses
Taken steps to show you have a built a defensible position for the company for example by the use of copy-right or having protected your brand. If you have a patentable idea you may want to raise angel investment to formally fulfil your patent application.
Understandably, companies already generating revenue or better still, a profit, are sometimes more likely to secure angel investment as angels can see a higher likelihood of return.
Pre-revenue businesses can often be very high risk ventures and businesses in this position will need to show ‘proof of concept’ or have a protected idea such as relevant Intellectual Property. Businesses in the Medtech, CleanTech and other science-based industries are more likely to be pre-revenue when seeking angel investment.
‘Idea stage’ businesses are typically not angel deals. ‘Family, friends and fools’ are often the investors for this business stage!
If you are at the idea stage, do consider accelerators. You may need to turn to your family and friends, possibly even grants at this stage.
How do start-ups find angel investors?
A great place to start is the UK Business Angels Association Membership Directory pages. Investors are searchable by size of investment required and region. All of UKBAA’s members have signed up to a code of conduct, and are FSA regulated, guaranteeing standards.
How much capital can one typically expect to raise?
As a rule you need to establish how much funding you will need to raise to sustain your business through 12 months of growth. You will need to identify what it is you need the money for. That will help you establish how much you are looking for.
Angel investment ranges from £10,000 – £500,000, with deals of up to £2m being possible with syndication.
How much equity does one typically need to offer in return for funding?
Angels cannot take more than 30% equity in your business under the EIS/ SEIS scheme. You need to be incentivised to grow and scale up your business! Plus you need to have equity left for future funding rounds – so be wary of giving away much more!
What are the common mistakes that people make when using angel investors?
You always need to be 100% sure you are happy to give away shares.
Angels are not just ‘the money’ you will look to them for contacts and strategic support.
Be happy to have strategic advice given to you by an angel.
Be ready to have an honest and open relationship – don’t be afraid to tell them if you have a problem; they want to help!
Angels are not Dragons! It is essential you have a great relationship with your angel/s from the outset. Chemistry is very important.
Find an angel with experience in your industry!
Do you have any case studies of start-ups that have successfully grown using investment from angel investors?
There are many – see examples of some of the world’s most recognisable fast-growing businesses that began with angel funding:
Green & Blacks
Pret A Manger
What are your top tips for securing angel investment?
You will kiss a lot of frogs.
You won’t get the money tomorrow – getting equity investment can take around 3 months from the outset.
Be Honest and Transparent with your investors.
Always ask yourself ‘Why would I invest in this business?’
Management is very important – having a diverse management team is an attractive proposition.
Don’t give away too much of your business! You won’t have any left to give away for future rounds.
About the UK Business Angel Association
The UKBAA is the trade body for angel investing in the UK. It was established in 2012, having superseded the previous trade body entitled British Business Angels which was set up in 2004. UKBAA represents the angel market in the UK and its main role is to build the ecosystem for angel investing, create better connectivity between the angel community and all other relevant sources of finance and support, act as a voice of the angel community to government and other relevant opinion formers; provide a hub for information, market intelligence and developments on the angel market.