Ultimate guide to angel investment

Angel investors are individuals who put their own money into early-stage startups in exchange for a minority equity stake. They're often seasoned entrepreneurs with a wealth of business acumen, providing not only funding but also expertise into businesess.

Typically, angels will invest in a company in return for a certain amount of equity, although exact terms and conditions tend to be worked out on a bespoke basis through negotiation. The financial input of angel investors can be absolutely invaluable at a time when fledgling companies need to prove themselves and stake their claim on the market – but it’s very rare that angels offer something for nothing. Getting the right deal is a matter of careful negotiation and compromise.

In this guide, we’ll help you to understand more about how it works and what to consider.

What’s the difference between angels and VCs?

Many people get confused about the difference between angel investors and venture capital (VC) investors, so let's clear that up:

Angel investors are private individuals or networks who invest their own money, usually in amounts under £1 million. They may ask for equity in the company in return, but deal conditions vary and are negotiable.
Venture capital investors are professionals who operate through firms investing client money rather than their own personal funds. They are often less flexible than angels in negotiation, but payouts tend to be larger - £1 million and above. Becuase of this, startups tend to aim for VC investment from seed up to the Series rounds.

Pros and cons to angel investment

Angel investment may be exactly what your company needs to get itself properly established - but nothing is without its drawbacks. Whether the pros outweigh the cons depends very much on your own context and circumstances. Read on, to find out whether or not angel investment is right for your company at this time.

The pros

1. Less risk averse

Angel investors have more autonomy than banks or VC firms. This usually makes them less risk averse - or at least more open to persuasion. This is the reason that angels are often a good match for young, unproven firms trying to get established.

2. They give you money

Let’s not lose sight of the main event here. Angel investors put money into your company. You’ve got to have money to make money, as the saying goes, and a good investment deal can mean the difference between sinking and soaring.

3. You don’t have to pay the money back

Investments don’t work like bank loans, which means you won’t have to pay your angel back. On the flipside, you probably will have to relinquish a degree of equity in your company. But not having repayment installments to worry about is invaluable when your business is at a stage of making little or no money.

4. Experience and advice

If you’re canny, you shouldn’t be looking only for money from your angel. Angel investors typically have years of business experience behind them, not to mention an established network of contacts, all of which you can draw on for your own business. Having an angel to mentor and advise you will greatly increase your chances of business success.

The cons

1. Higher expectations

Angel investors are often less risk averse than other investors - but with greater risk comes greater expectations. While you won’t be paying back the specific funding they gave you, your angel will want to see a return on their investment. The returns asked for are often higher than would be the case in a more structured, less risky funding deal.

2. Loss of equity

Usually, angel investors will provide funding in exchange for equity - an ownership interest - in your company. This ties them into the future of your business and gives them a stake in any profits you make as your company develops. This isn’t necessarily a bad thing, but it’s worth serious consideration before you sign anything.

3. Loss of control

Trading equity in your company can mean losing a degree of control over your business decisions and many angels want a say in the direction your company takes. Their advice and expertise may be invaluable, but you may also find them sticking their oar in where it’s not wanted.

How do you find angels to invest?

If you’ve weighed up the options and decided that angel investment could be what you’re looking for, the next step is to find the right angel.

It’s important at this stage to not just reach blindly for the first wealthy investor you come across. Remember, you’re likely to be working with this person for some time to come, so you need to make sure that the person you pitch to is a good match on a personal and professional level, as well as from a financial perspective. Do your research into the angels you come across before trying to set up a pitch.

There’s no hard and fast route to finding an angel investor. But there are a few things you can do to improve your chances:

1.Do your research

Ask around, do a bit of googling, talk to people in your industry who’ve been there before. The old saying "it’s not what you know, it’s who you know" is particularly apt; "warm" introductions through a mutual contact are more likely to yield results than pitching cold.

If you don't have a large network, don’t worry! Building up connections can take time, but it’s time worth spending. Reach out to the business community, attend conferences and networking events. As well as gleaning valuable connections which could lead you to your perfect angel investor, you’ll also benefit from the support and experience of your peers.

2.Attend pitching events

Startup and investment pitching events are held regularly in cities all over the UK. These will give you an opportunity to put your ideas before angel investors seeking standout startups. Be prepared, and make sure you’ve got something to make you rise above the crowd because you could find yourself up against some stiff competition.

Check out sites like eventbrite, and keep your ear to the ground in your business community.

3. Consider syndicates and networks

Some angels form associations, networks, and syndicates. This is where the line between angel investment and venture capital can get a little blurred. In general, these associations and networks work towards putting angels in touch with businesses, but they also sometimes work together in a more corporate manner.

Even if you don’t like the idea of pitching cold to an angel association, it’s worth following them or subscribing to their newsletters. Doing so will help you to learn more about the world of angel finance, and keep you informed about pitch events, investment opportunities and the like.

Check out the UK Angel Investment Network, the UK Business Angels Association, and Angels Den for a start.

What do angels look for in start-ups?

Every angel is different, so it’s important to research their own preferences and investment history before going into pitch. In general, however, a shrewd angel is likely to be looking for the following in their potential investment:

1.Great people

Companies are made of people, not numbers. You and your team are the secret sauce of your company. Demonstrating that you’ve got a tight, committed, passionate team behind you will make any investor sit up and take notice. If you can, bring key players to pitch meetings and involve them in the discussion. Getting angel investment is as much about forging relationships as anything else.

2. Passion and enthusiasm

Angel investors won’t put their money into anything that seems like it’s a passing fad for you and your team. For something to gain long-term traction, it needs to be born out of demonstrable passion and enthusiasm. If you’re truly putting your heart and soul into what you’re doing, let that show during your pitch. Lasting enthusiasm will carry your company on an upwards journey – and passion is infectious!

3. A good business plan

But it can’t all be about people and passion, you'll need to back these things up with a solid, practical plan. A good business plan should be short, pragmatic, and to the point. You can find more information and business plan templates through the UK government website.

4. Solid return potential

An investment is not a charitable donation and angel investors want to put their money to work. If they don’t think that your company is going to pay decent returns eventually, they have absolutely no incentive to invest. Everything we’re talking about here should ultimately combine to convince your audience that you’re a solid prospect who will take their money and add to it.

5. A good match

There’s more to angel investment than just showing off your business plan and getting money in return. Angel investors will want to work with you to some degree going forward – and you, in turn, can really benefit from the expertise and experience of the right angel.

Investors seek startups that are a good match for them, both in terms of their industry expertise and experience, as well as personality and work style. It's a two-way street and so if one or both of you feels that you can't sustain a good working relationship, there'll be no deal.

How to impress them

You’ve selected an angel, researched them, and you think that they’re a good match for your business. Now what?

Well, now you need to pitch to them.

Above, we’ve covered what angels will be looking for in potential investments. So, obviously, you should try and incorporate these elements into you pitch. Here, we’ll go into a little more about what you can do to give your pitch some pizzazz:

1. Be passionate and enthusiastic

We’ve been through this in more detail above, but it’s worth reiterating. Let the passion and enthusiasm of you and your team shine through in everything you say and do.

2.Be honest and realistic

Let’s not confuse passion with blind optimism. Emphasise your strengths, sure, but don’t downplay your weaknesses. Honesty about who you are, where you are, and what you need to work on will demonstrate that you know what needs to be done to get your product and business model to the top. Failure to understand (or acknowledge) weaknesses is the death knell for many companies – showing that you have a strong, grounded sense of realism is very important.

3. Have a great pitch deck

We could go on for pages and pages about preparing the perfect pitch deck (and have! Check out our blog on how to create a winning pitch deck). Your pitch deck is the main weapon in your arsenal at this point.

Try to keep it short and sweet – ideally around ten slides. Make sure it’s well structured, running from the problem and opportunity you’re addressing, through to your business model, your unique selling points (USPs), your team, your go-to market plan, your competition or market analysis, your financial projections, and your achievements so far.

4. Be prepared to "elevator pitch"

Take your pitch, and make a thirty-second version of it. For your elevator pitch, you essentially need to cut out all the unnecessary detail and get right to the nitty gritty your concept.

It’s tricky to cut the major focus of your life and career down into a thirty second snippet, but it’s well worth doing. If a pitching opportunity crops up at an event, when you’re out and about – or even in an elevator – you won’t have long to get your story across. If your potential investor likes your elevator pitch, they’ll give you an opportunity to expand on what you’re saying.

5. Include the investor

Show that you’ve done your research into the person you’re pitching at and that you are looking to make a commitment to a business relationship. Talk about what you think the investor could bring to your company – other than the money – as well as what your company can do for them.

How much equity should you give away?

This is the tricky part. Negotiating how much equity to give away – and the terms of that exchange – can be tough. Usually, angel investors want between 10 and 20% equity, but it all depends on:

1. The nature of your business

Some businesses are more set up for equity exchange than others. For example, a business model which relies very much on the drive and skills of a single individual will be less suited to equity division than a more communal enterprise.

2. The nature of your investor

All angels are different, and they will all want different things. Some will be happy to take a back seat and simply reap dividends, while others will want a more active role in steering your company. If you prefer to maintain a degree of control over decisions, you may want to limit the amount of equity you give to the latter kind of angel, and vice versa.

3. How much you’re pitching for

The more you give, the more you get. A certain degree of haggling and negotiation is expected, and you should be prepared to compromise. If you want a lot of money, you have to expect to give away more in return.

4. The value of your business

The more valuable your business, the more negotiating power you have. However, valuing your business in the early stages – when you’re dealing more in "potentials" than in actual facts and figures – can be a tough call.

Our guide on how to value a business should help answer your most burning questions. It’s worth noting that your investor is likely to take into account the market forces within the sector that you operate. If you’re going into a growth industry, and the supply:demand ratio is weighted in your favour, you’re in a stronger position than you otherwise would be.

Ultimately, to make the call on your equity deal, you need to ask yourself two basic questions:

1. Is the funding deal on the table worth the loss of equity?

2. Is this angel a good match for you and your business?

Only you can answer these questions properly, so think carefully.

Angel investment has been a godsend for many startups. The right angel investor will not only seed your burgeoning company with funding, they’ll also provide mentoring, connections and expertise to further your position within the wider business community. The working relationship you build with a good angel investor can be as valuable (if not more) than the money they give.

However, to get the best out of the world of angel investment, you need to do a lot of research – both into potential investors, as well as into your own company and the market you operate in. Realism, enthusiasm, and market knowledge will impress, but it’s not all about saying the right things in order to get the right amount of money. Dealing with an angel investor is about building a trusting working relationship – and that relationship needs to be good for all parties involved.

There are plenty of angel investors out there, all interested in different sectors, and all looking for different things from their investments. One of them will be perfect for you and your startup – it’s just a case of finding them, honing your pitch and building a rapport.