1. What are Business Angels?
Business angels invest in businesses in exchange for a share of the business’ equity. Most business angels invest between £10,000 and £750,000.
Business angel investors usually invest in start-ups or young businesses that need to fund activities like product development or market expansion. They can make investment decisions quickly but will still need to see that you have a good business plan before they commit.
Business angels may take an active role in your business and can be a useful source of knowledge, mentoring and contacts.
Business angels may invest alone or in syndicates.
The government encourages business angel investment though tax incentive schemes such as the Enterprise Investment Scheme and the Seed Enterprise Investment Scheme. It is worth finding if your business is eligible as this can help attract angels to invest.
It can be difficult to find business angels on a one to one basis, the most effective way to access business angels are via business angel networks. These are organisations that introduce companies to business angels through investment bulletins, website matching services and pitching events. They also help to ensure companies are investment ready.
3. Pitching to business angels
Business angels are more likely to be interested in your proposal if they:
- understand the product or service
- have worked in the same industry
- are confident that your business is well managed
- feel they can bring added value to your business
- are not being asked for a huge investment, or repeated investments
When pitching your business plan to a business angel you should cover:
- the benefits they would gain by investing
- details of the investment required
- terms of the proposed deal – eg share, skills you offer and timescale of investment
- the ability of your management team to implement the plan
It can take several months to finalise business angel deals and for funds to be transferred.
Legal elements of business angel deals include:
- shareholders’ agreement – relationship between the shareholders
- subscription or investment agreement – terms of the share subscription
- service agreement – eg employment contracts with managers or directors
- other contracts – with more junior employees, suppliers, or customers
- disclosure letter – details of any warranties or assurances agreed between the parties
- memorandum – list of company’s powers – eg to borrow money – and the amount of share capital
- articles of association – company’s internal regulations
- share options – eg giving tax-advantaged share options to new or existing employees under the government’s Enterprise Management Incentive (EMI) scheme
5. Pros and cons off financing through Business angels…
- business angels are free to make investment decisions quickly
- no need for collateral – ie personal assets
- access to your investor’s sector knowledge and contacts
- no repayments or interest
- business angels are invested in your business’ success and can help you explore new ideas
- can take some time to find a suitable business angels investor and secure the investment
- less structural support available from a business angels than from an investing company
6. Common mistakes…
You may be refused business angel finance because you haven’t made sure that you are ‘investment ready’ before you approach potential investors.
You should also identify potential risks and how you might overcome them.
Investors will want to know if there will be an exit opportunity and that they can recover their investment and make a profit. You should be able to tell them about your business’ long-term plans and ambitions.
7. Funding sources
You can use the Business Wales finance locator to search for business angel sources.