Fundraising Tips: Angel Investors
16 December 2021 |
Angel investing is effectively the next step up from crowdfunding
The sums are greater, the investor involvement is higher and it is slightly trickier to access. However, the payoff from a successful relationship with an angel can be huge.
Angel Investors are typically wealthy individuals who have a background in investment. Often, they are entrepreneurs themselves who have sold their business and want to invest their money in companies they perceive to have a good trajectory for growth. But it’s not just about the cash; angels will get involved in the strategic decisions of your company, lend their expertise and open up their book of contacts to your business. Done correctly, investment via an angel can propel your business towards great success and help you achieve the growth of your dreams.
What do you need to do to successfully raise money with an angel?
Unlike crowdfunding, where you’re typically dealing with tens or even hundreds of investors, when it comes to angel investing, there tends to be one lead investor who will contribute the most; this can be anywhere from 100k and up. They will either be part of a syndicate or represented by a wealth management firm.
The first step is to find them; you’ll come across plenty if you google search but the real challenge is to connect with someone who knows them. The trick is to do your research. Find out who the main coordinator of the syndicate is; this individual may or may not be an investor but they are of critical importance as they’ll be your route into the syndicate. Build a relationship with them and understand their requirements. Unlike crowdfunding, which is done online, angel investing is very face to face. You might have a phone conversation first, so they can pre-qualify you; but from then on, the presenting will be done in person. You will first pitch to your contact, who will act as the filter point between you and the syndicate. If successful, they will invite you to meet the rest of the syndicate. Investors typically meet every other month or once a quarter. They hold evening sessions with half a dozen companies pitching to 8-20 investors. In this sense, it can feel a bit like Dragon’s Den, although we’re yet to see piles of money on the table and dramatic music in the background! That being said, you will need to answer their questions and convince them of the validity of investing in your company.
Conversely, you may be dealing with a wealth management firm who represents a number of wealthy individuals. At our sister company, Add then Multiply, we raised money solely through dealings with such a firm. We prepared documents, agreed on terms and pitched to them. They carried out their own due diligence and over the course of 6 weeks, we raised over half a million pounds. So, it may be syndicates, it may be firms, but the relationship you have with your contact is of critical importance and you must have a good one to successfully raise money in this way.
How does it work?
Whether you raise money through an angel or a syndicate, there will typically be one lead investor who will get involved in the strategic direction of the business. If we take the example of a syndicate with which you raise half a million; there will be a lead investor at up to £200k perhaps 10 others at between £25 and £50k. The lead investor will typically sit on the board of directors and will represent the interests of the angel syndicate. Their wealth of experience and bursting book of contacts can open doors for you. Therefore, your relationship is key. It shouldn’t be overly friendly as the angel’s primary concern is to represent the investors and their funds, but it should be a strong and productive working relationship.
It is worth noting that angels are considered ‘sophisticated investors’. This is not to say that those who invest via crowdfunding are not sophisticated, it is a regulatory statement that refers to the rules in the UK that prohibit companies from raising money from the general public, unless the people that they are raising money from can prove themselves to be ‘sophisticated investors’. Angels are the first tier in this category and are required to follow a complex set of rules that comes with being a ‘sophisticated investor’. 
What kind of business can use angels?
Typically, if businesses are going for angel rounds, they’ll be looking to raise half a million or more. Syndicates will want businesses that are already established and have revenue. Ideally, they’ll be making profit or have an indication of it. Tech companies are a bit of an exception as the industry is so hot. If the company is relatively new, but showing traction in the marketplace, they can successfully raise money this way.
How involved are the investors?
They can get very involved. Let’s take the example of an emerging tech start-up who gets an angel on board; say this angel was an entrepreneur in the same sector and sold their business. They’ll know what it takes to make the business work and will want to understand the code and how it’s being built. The angel will also want to get an idea of the development time frame, the resources needed and will be involved in the recruitment of key people. They’ll be looking at the financials to make sure the business is on track and operating in line with the budgets, both on the cost and revenue side. At Add then Multiply, we’ve seen businesses who have raised and spent the money they set out to, but the revenue side hasn’t been driven in the way it was promised. Perhaps customers aren’t signing up, and the business isn’t performing to plan. In this instance, the angel may get more involved. They have the right to do so, both as an investor and director under the agreement that you put in place. There will be protection clauses in the agreement which may lead to structural changes or cuts in salaries if the business doesn’t perform as expected. Alternately, when times are tough, the involvement of an angel can be a gift, as their experience can help you to navigate through difficult situations.
The benefits of raising money through an angel or syndicate can be enormous. This route is ideal for relatively established businesses looking to raise up to £1 million. As an entrepreneur, you must cultivate a strong and positive working relationship with your investor, welcoming their input and expertise. Do your research, perfect your pitch and be prepared for any questions you may be asked. Your angel will likely be an expert in the industry so it is vital you are open and honest with them both when times are good and bad. With clarity, they can help you overcome challenges and exceed expectations. Their name comes as no surprise when you realise the full potential of an angel; they can help your business grow wings… even fly.