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Key takeaways

• Angel investors provide initial seed funding or growth capital to startup businesses, usually in return for a minority stake in the company

• They often take a punt on startups that would struggle to get a business loan under normal circumstances

• Angel investors are the largest providers of funding in startups and young, growing businesses in the UK

• While some angel investors are happy to be silent partners, others want a hands-on role in running the business 

What is an angel investor?

Angel investors – also known as business angels – are typically affluent individuals who invest their own money into early-stage businesses in exchange for equity.

They offer an alternative to business loans or self-funding and usually seek better returns than those available from savings accounts or traditional investments.

Some prefer to be silent investors without getting involved in day-to-day operations. Others may take a more active role, often providing advice or mentorship based on their experience.

While some angel investors invest alone, many join together as syndicates. This enables them to pool their resources and support startups they believe in.Ìý

The stake angel investors want in a business depends on how much they invest but is generally between 10% and 25%. The investment offered in return can be anything from £5,000 to £500,000, or even more in some cases.

They typically aim for a 10-fold return within approximately six years – hoping, for example, to turn a £100,000 investment into £1 million.

How does angel investing work?

Angel investment can offer a one-off cash injection or an ongoing funding arrangement. Either way, it’s usually in exchange for ownership of an equity share in the company.

As the recipient, you don’t have to repay the money invested. But you do have to share any profits made according to the percentage of the business you agree to sell.

This means you only start paying off the angel investor if your business idea succeeds.Ìý

However, it also means giving up some control of your business idea – especially if your angel investors want day-to-day involvement in the company's management.

There are ways to structure the relationship, depending on how involved the angel investor wants to be. Some are content to stay in the background, while others prefer a more active role in shaping the business. It's important to agree on expectations early.

As business angels usually plan to get their money back within five to eight years, taking on angel investment may also mean selling your company – or listing it on the stock exchange – when you reach that stage.

The pros and cons of angel investors

Angel investment can be a great way to take your business dreams to the next level. But it can also be an expensive way to finance a business in the longer term – especially if your company flourishes.Ìý

If your angel investors insist on getting involved in running the company, it can also prove a lot more frustrating than simply taking out a start-up loan.Ìý

Is angel investment the right business funding source for your company? Here are some of the main pros and cons:

Advantages

• The money you receive is an investment rather than a loan – so you don’t have to pay it back in instalments

• An angel investor may agree to invest in a high-risk business that would struggle to get a loan, providing they see growth potential

• Angel investment terms are often more favourable than you could get from a bank or other lender because there’s no interest to pay 

• Convincing an angel investor to invest in your business means it has a reasonable chance of success – business angels only invest in promising ventures

• Your angel investor can use their expertise, experience and network to grow your business. They may also provide additional funding at a later stage if necessary

Disadvantages

• You must give up a stake in your business, meaning you have to share future profits and possibly all decision-making with your angel investors

• Angel investors want to make a return on their investment, so they may push small businesses to grow faster than they might otherwise choose

• Most angel investors want an exit plan after a certain number of years, which may involve selling the company (unless you go public or can afford to buy them out)

• The eligibility and verification process can be long and complicated – you can expect it to take at least two months and sometimes a lot more

How can I find angel investors for my startup?

Finding angel investor funding for startups is not always easy.Ìý

So, unless you have friends or family members who can become angel investors in your company, it’s best to target investors with a track record of supporting similar businesses to yours.Ìý

You need to connect with potential angel investors, and that’s easier if you’re working in the same field.

Here are some tips for attracting a business angel’s interest:

• Attend professional events for the sectors or industries in which you want to launch a business

• Enter pitch competitions organised by angel investment organisations such as the

• Search for suitable investors in online angel investor directories and lists

• Get in touch with local businesses that already work with angel investors in your area/sector

What do I need to approach an angel investor?

Preparation is one of the key's to success when it comes to angel investment. You need a compelling pitch that illustrates your commitment to building a successful business. You also need to be open and honest about your ambitions and investment requirements.

On a financial level, you also need to have managed your HMRC obligations and be able to provide evidence – including business bank account statements – demonstrating your current situation (turnover, profit, sales and growth) or plausible forecasts of those figures if your business is yet to get off the ground.Ìý 

To secure the investment you need, it’s also important to have a clear idea of:

• Exactly how much you need

• How you plan to use the money

• How you expect the investment to impact your business 

Dos and don’ts when approaching an angel investor

Angel investors look to invest in you as much as your business, so it’s vital to make a good impression personally as well as professionally. Here are some pointers to get you on the right track.

Do

• Research your target investors to ensure their interests are aligned with your business

• Develop a solid business plan before seeking investment from angel investors

• Be open and honest – angel investors value transparency, so there’s no point trying to hide things

• Work hard on your pitch presentation – telling a story is a good idea, as long as it’s backed up by facts and figures

¶Ù´Ç²Ô’t

• Bombard potential investors with unsolicited emails that are more likely to annoy than impress

• Share sensitive information that could jeopardise your business if in the wrong hands

• Put pressure on investors to make a quick decision – you both need time to consider your position

• Ignore investors who reject your proposal – they may be a gateway to other investors or want to invest in the future

How do I nurture my relationship with an angel investor?

Nurturing angel investor connections is an ongoing process that requires you to stay in regular contact with the individual or individuals who have invested in your business.

You will generally need to provide periodic updates on your progress and keep your investors informed of any challenges or opportunities that arise. Beyond that, the level of involvement you have with angel investors will depend on their expectations.Ìý

For example, if your investor wants to take a hands-off approach, financial updates and occasional meet-ups may be sufficient to maintain a healthy relationship.

But if your investor wants to be involved in the business, you may need to stay in much more frequent contact.

This isn’t always a bad thing, particularly if your angel investor can provide valuable industry insights and expertise.Ìý

Either way, it’s also sensible to ask your angel investor for feedback from time to time to ensure your goals and vision remain aligned.

Our 5 top tips for attracting angel investors

• ¶Ù´Ç²Ô’t waste time contacting angel investors who do not invest in your sector

• Send out personalised communications to angel investors you believe may be interested in your business – group emails will rarely yield results

• Tailor your offer to the specific investor’s interests and investment aspirations

• Follow up promising meetings promptly to reinforce your key messages and your desire to work together

• Take your time finding the right investor – and build a relationship with them before asking them to invest

Is angel investment right for my business?

Angel investors look for startups they believe can expand quickly, allowing them to make a return on their investment in under ten years. This means they prefer startups and young companies with a low turnover and plenty of growth potential. As a result, business angels tend to invest in:

• Startups or profitable early-stage businesses

• Companies with a turnover below £5 million

• Firms seeking finance of between £15,000 and £500,000

• Businesses with a clear growth strategy

• Companies who want money to fund a particular strategy, such as new product development

• Organisations who are willing to sell a share in the business

• Business people who are prepared to take advice and guidance from their angel investors

If your business does not meet these criteria, you will probably be better off with an alternative form of funding.

What are the main alternatives to angel investors?

Angel investment is not suitable for all startups, but plenty of other types of funding are available. The right choice for you depends on your sector and the conditions you’re willing to accept.

You must repay some types of funding in full. Others involve paying a return on the investment, just as you would an angel investor.

For startups, the alternatives to seeking an angel investor include:

• Equity/debt finance

• Startup loans

• Venture capitalists

• Government grants

• Crowdfunding (including equity crowdfunding)

• Asset finance

• Peer-to-peer lending

You can learn more about how these different types of business finance compare by reading our handy guides on how to get funding for a business and six easy ways to get business finance.