The term 'angel investor' will probably be familiar to fans of popular BBC show Dragons' Den, which sees entrepreneurs pitching for business investment from the likes of serial entrepreneurs Peter Jones, Duncan Bannatyne and Deborah Meaden. However, if Dragons' Den doesn't tend to feature on your Sunday night viewing schedule, you could be forgiven for thinking that angel investors were something spiritual. Even fictional.
To help clear things up a little, here's a simple guide on everything you need to know about angel investors.
What is an angel investor?
An angel investor is a wealthy individual or business that provides funding to startups and growing businesses in exchange for a share of equity. As well as making a financial investment into a company, the majority of angel investors will also offer advice to business owners, and provide them with key contacts to help grow their business.
to the UKBusiness Angels Association, there are currently around 18,000 angel
investors in the UK, and they invest an estimated £1.5 billion per year into
businesses of all shapes and sizes.
Angel investors vs. venture capitalists
While an angel investor is a person who invests their own money into a business, a venture capitalist is paid to invest the money of others, usually institutions, in companies with high growth potential. Typically, an angel investor will invest tens or hundreds of thousands of pounds into a business, whereas venture capital firms will invest substantially larger sums, often up to hundreds of millions. That’s why angel investors tend to get involved with early-stage businesses, while venture capitalists deal largely with companies that already have a track record of growth behind them.
Finally, angel investors can offer their support and advice to a business, but they don’t have to sit on the board of a company. On the other hand, venture capital firms will usually take a place on the board and have a say in the day-to-day running of a business. That’s why angel investment tends to be a more attractive option to startups, as it ultimately means retaining control of the company in the early stages.
In recent years, angel investment has been opened up to the masses with the emergence of crowdfunding. This form of funding allows practically anyone to become an angel investor, and often relies on smaller investments from a large number of people. Sites such as Crowdcube, Bnk to the Future and Seedrs are providing businesses with a platform to attract investors, and although you don't always get the experience or connections from the investors, you can get financial backing cheaply. Because the shares are held as one unit, it also means you don't have to worry about balancing the interests of all of your shareholders.
Most angel investors tend to have business and entrepreneurial backgrounds of their own, and are looking for promising projects to back. Be wary, though – it can sometimes be difficult to manage the expectations of angel investors who may want to grow and run your business. Most angels will be quite involved with your business, at least in the early days, so it’s crucial that you see your interests as being aligned with one another.