The term ‘Angel Investment’ refers to private investment in a company by a wealthy individual. 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. Amounts and payment styles vary depending on the particular angel and the particular business, but we’re generally talking seed funding under £1 million.

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. Most will want to see returns on their investment eventually. You need money to make money, but don’t blindly grab for the cash. Getting the right deal is a matter of careful negotiation and compromise. In this article, we’ll help you to understand more about how it works and what to think about.

What’s the difference between angels and VCs?

Many people get confused about the difference between angel investors and venture capitalists. In general, angel investors will be using their own money and negotiating their own terms, while venture capitalists usually operate as part of a VC firm, investing the money of their clients rather than their own personal funds.

  • Angel investors — 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.

Pros and cons to angel investment

Nothing is without its drawbacks. Angel investment may be exactly what your company needs to get itself properly established — but there are pros and cons to everything, investment included. 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.

Pros

  • 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. It’s this which makes angels a good match for young, unproven firms trying to get established.

Cons

  • 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 returns on their investment. The returns asked for are often higher than would be the case in a more structured, less risky funding deal.

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.

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:

  • 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 apposite here. ‘Warm’ introductions through a mutual contact are more likely to yield results than pitching cold. If you’ve not got 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.

It’s very 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 at 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.

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:

  • Great people. Companies are made of people, not numbers. It’s you and your team upon which the success of your company ultimately depends. 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. Gaining angel investment is as much about forging relationships as anything else.

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:

  • 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.

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:

  • 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.

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 a great 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 (if not more!) valuable as 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 a potential investor, 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.

Good luck!

Digital Risks is an Insurtech100-recognised leader in Insurance — specialising in insuring startups and digital businesses

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