The basics of angel investing
What is business angel investing?
An angel investor makes use of their personal disposable finance to invest in small businesses that they have identified as having growth potential. An angel investor would normally take shares in the business in return for providing equity finance.
Angels use their knowledge, skills and insights to make their own decision, rather than leaving the decision to an external adviser. You may take your decision through face-to-face contact, or you may be identifying your deals through an online platform.
A key aspect of being an angel investor is the capacity to bring not only finance to help the business grow, but also to draw on your own experience, contacts and links to help the company achieve success post investment. You may be an active investor, or may act passively, often as part of a group of investors and where generally an investor is identified to take the lead in following the deal.
Angel investors seek to share in the successful growth and have a return on their investment. However, angel investing is generally regarded as “patient capital” and you may not see an exit or a return for up to 8-10 years.
Whilst business angels can invest on their own, more frequently angels invest alongside other angel investors through syndication. This enables you to pool your funds and share the risks, as well as share the due diligence and experience of other investors. Find out more about syndication.
Angel investing is risky and market research has shown that 58% of angel deals may not return the original stake money. However, there are ways of mitigating your risks through developing a diversified portfolio of investments and taking reasonable steps to carry out due diligence, also developing your own skills and understanding of the angel investing process, also actively supporting your investee businesses post investment. Find out more about UKBAA-accredited training courses on being an effective angel investor.
Angel investors can also benefit from the enterprise investment scheme (EIS) enabling access to tax benefits to support risk mitigation when investing in relevant qualifying companies.
Find out more about the enterprise investment scheme.
Key considerations for angel investing
Is angel investing regulated?
There is a regulatory framework for angel investing that both protects the angel and the entrepreneurs.
Before receiving business plans or beginning to make angel investments, you should ensure that you are self-certified as either a High Net Worth or Sophisticated Investor, as defined by the FCA under the Financial Services and Markets Act 2000 (FSMA). Download the investor self-certification forms here.
As an individual angel under the FCA Financial Promotions Order you are entitled to receive business plans and make investments through your own decision, provided that you are able to certify yourself as either a High Net Worth Individual or a Sophisticated Investor.
A certified high net worth individual
You confirm that you either:
• have a net income in excess of £100K or
• have net assets in excess of £250K beyond your pension fund assets and your private residence
A certified sophisticated investor
You confirm that have been one of the following:
• A director of a company turning over at least £1 million within the last two years
• Have made more than one investment in an unlisted company in the last two years
• A member of a network or syndicate of business angels for at least six months
• Have worked in the past two years in a professional capacity in the private equity sector or in the provision of finance for small and medium enterprises
Download and complete self-certification forms.
How does angel investing differ from VC or VCT investing?
Angel investment differs from venture capital (VC) funds or venture capital trusts (VCTs), which invest in businesses through managed funds, raised with private or public money. The fund manager invests the money on behalf of the fund which has to make a return for the fund’s investors.
Due to high costs of administration and the need to be very selective to ensure a return on the fund, VC funds are likely to be more risk averse and thus make larger-size investments and fewer investments in start and seed stage. So business angels are becoming more and more significant in funding new ventures by supplying smaller amounts of capital to companies that cannot be economically funded by the established VC market.
Unlike investing in a managed fund, business angels make their own decisions about investments they make. Angels also engage directly in the due diligence and investment process, and are signatories on the legal investment documentation, unless you are making investments through a nominee structure which may be the case for example as part of a managed syndicate investment vehicle, or through an equity crowdfunding platform.
Business angels differ from VC firms not only in the size of their investment, but also in their approach. Angel investors are less concerned with rapid return and exit and are prepared to support the business through its path to growth and exit over a longer timescale.
Many VC funds are willing to co-invest alongside angels and can help to bring larger sums where more significant levels of finance are needed. This can also be useful when the business needs to make further expansions beyond the existing financial capacity of the existing angel investors. It can be possible for angles to also take a partial exit at this time VC funds and VCT funds may have different share structures (e.g., with shares with preferences) and it is important to understand the structure and how your own shares may be affected.
See the UKBAA directory of VC and VCT members
EIS- and SEIS-managed funds
If you invest in an EIS or SEIS fund, you will receive your tax breaks through the investment in the fund. However, you are likely to be taking a passive approach, and may have no say in which businesses the fund is investing in and you would not have any direct active involvement with the business post investment.
However, business angels do also invest some of their money in EIS or SEIS sidecar funds that operate as co-investment funds alongside angel syndicates. In this case you may have some say in the businesses that the fund invests in and the fund may also co-invest in deals in which you are also directly investing – you would in this way have the benefit of being more actively involved.
How much do angels invest in a business?
In general, individual business angels will invest anywhere between £5,000 and £150,000 in a single venture, depending on the business and the growth needs. But this can be lower and occasionally much larger sums according to the disposable wealth of the individual and opportunity identified. Also, with an increasing trend towards angels investing in groups and syndicates, larger amounts of finance above £1m can be raised by investors pooling their finance and also their business skills.
What kind of shares and structures do angels have?
It is important to note that angel investors should not be seeking to take control of a small business and usually investor would not take more than 20-25% in a seed or early-stage business. It is vital to enable the founders and team to be incentivised to grow the business and for the investors to be supporting not controlling the business. The business also requires to give away further equity for future growth rounds.
As an angel investor working with early-stage growth potential businesses, you should be seeking to align your interests with the business and thus take simple shares rather than complex or preferential share structures.
If you are using the EIS or SEIS scheme you are required to take ordinary shares.
Access further skills and competence in angel investing
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