When you’re first starting out in business, finding new sources of income is often difficult – but seeking the backing of a business angel may offer good solution.
What is ‘Angel Investment’
Business angels are individuals who choose to invest in a company, as opposed to institutions like investment companies and venture capital firms.
There is no ‘register’ of business angels, so it is hard to quantify the size of the angel investment market, however the UKBAA estimates that there are almost 20,000 angel investors in the UK, injecting £1.5bn annually into various businesses and schemes.
Just like on the popular TV show Dragons’ Den, business angels work closely with you and provide not just their cash but their expertise as well.
As with investment companies, they will very often ask for a stake of a certain percentage in your company, which will require you to bite the bullet and work out what you want to cede in return for that all-important up-front cash.
What roles do business angels typically perform for new businesses?
The first role a business angel can perform for you is entirely focused around cash.
When you run a new business, often this is your most pressing need. If you work in the tech industry, for example, it’s possible that you need to hire some coders or programmers who can come along and help you build the product of your dreams.
Or if you work in manufacturing, it’s likely that you’ll need to invest in some sort of cutting-edge piece of equipment.
Angel investors are able to provide this kind of cash without going through the long and time-consuming process of applying to firms like venture capital companies. It’s not uncommon for new companies which apply to venture capital firms to get rejected hundreds and hundreds of times before finally securing funding.
And while acquiring a business angel is also not guaranteed, the fact that only one individual is involved in the decision-making process does mean that you tend to find out their decisions earlier and can save time before moving on to the next option.
But it’s not just about the cash. With almost all business angels having many years of entrepreneurship under their belts as well as large bank balances as a result of their successful ventures, they are also able to provide you with knowledge.
Say you’re considering a major pivot from where your business plan originally began, and you intend to target a new market. Your business angel may have been there themselves several years ago or have another entrepreneur in their portfolio who has had a similar experience, and hence will be able to advise you on the risks and pitfalls associated with the decision you’re about to make.
Depending on the business angel, they may also take up a position on your new company’s board. While some investors may simply choose to be what’s known as a “sleeping partner” and not actively participate in the business, others may want to play an active role in order to ensure that they see a return on their investment down the line.
It’s unusual for angel investors to take an executive position, however, so do bear this in mind when negotiating with potential business angels.
How can I find a business angel?
The first place to look if you’re searching for a business angel is your own network.
For example, is there a wealthy person you came across at a previous workplace who you’ve kept in touch with? Or perhaps you or a relative have a friend or acquaintance who likes to support entrepreneurs?
While sometimes it may take some real guts to approach someone you already know (or vaguely know) to ask for cash, the personal connection it provides means you’re likely to get a more positive response.
There are lots of third party websites which link up entrepreneurs and business angels, such as AngelList. If you need some more guidance, you can also speak to the UK Business Angels Association.
Larger, professional social networking sites such as LinkedIn are also excellent sources of business angels. You can use the search function to find people who explicitly list themselves as business angels, while you could also search for terms like “chairman” or “director” and filter profiles by industry so that you only end up reaching out to those who are relevant to you.
When pitching to a potential business angel, you should always remember to personalise your pitch to them. Take a look at what they’ve been up to already, and refer to this information in your messages to show that you’re genuinely interested and that you’re not simply sending a cold, impersonal message.