Author: Andy Hall
When as an early stage company, you first consider raising finance from external sources you are probably thinking of a venture capitalist or lower market private equity house. However, this can be tricky if your business has little commercial traction or few visible proof points. A genuinely exciting and viable alternative form of finance that you may not have considered is Angel investment.
In this blog, the first of a series, I provide some background on Angel investors by answering some of the most common questions and assumptions.
Aren’t Angels just HNWIs?
Angel investors are high net worth individuals (or families) who want to invest their own capital. More often than not, Angel investors are also entrepreneurs who have founded and exited a business in the past, which is typically the source of their wealth. Angel investors are able to provide capital to businesses but also offer strategic advice. They can act as a sounding board to founders who may need guidance to take their business on a successful path to growth.
Where do Angels fit into the funding lifecycle?
Angel investors are useful at 'plugging the fundraising gap' between the funding supply from personal savings, friends and family and institutional raises. I often talk with early stage companies that are pre revenue and the amount of institutional investors prepared to invest in such businesses is limited because of the risks and the constraints of their investment mandate. In contrast, many Angel investors are more willing to invest in pre-revenue businesses with a compelling but unproven concept or strategy.
How much do individual Angels invest?
Given that many Angel investors do not publicly disclose their investments, the true size and number of investments made within the UK Angel investment market is unknown. Beauhurst recorded 404 equity deals in 2019 which included Angel investment. HMRC data shows that in 18/19, £1.82bn was raised in the UK via the EIS scheme, thought to be the most accurate proxy available.
Typical fundraising rounds involving Angels are between 100k and £2m. In 19/20, the average cheque per Angel investor was £100k, however this had dropped in 20/21 to £69k almost certainly due to the impact of the pandemic*.
Do Angel investors play nicely together?
It is common for multiple Angel investors to pool together as part of a syndicate to achieve the desired raise, which I will explore in greater detail in my next blog.
What do Angel investors like investing in?
The most popular sector for Angel investment during 2019 was Software as a Service (SaaS), with nearly 40% of Angels having made an investment into SaaS businesses. Most SaaS businesses will be capital light and will often have revenues that are contractual and recurring in nature. The combination of these two traits make SaaS investments a popular choice with Angel and institutional investors alike. Furthermore, over 50% of angels have made investments that fall under the umbrella of enabling/deep tech, often used within Healthcare, SaaS and Fintech businesses*.
It is common for Angel investments to be made into companies that qualify for the Enterprise investment Scheme (EIS). The various tax advantages available to investors offset the risk of investing into early-stage companies and Angel investors will often look for this qualification when choosing their investments. A more comprehensive summary of the EIS scheme can be found here.
Angel investors play a vital role in the funding process by backing founders based on a compelling proposition, often with little proof points. They are not deterred by the high risk and the undefined timetable for a return on their investment. Angel investors are crucial to many exciting, early stage businesses, helping them get off the ground and on a path to growth.
In future blogs I will explore the role of the Angel investor, who they are, how to raise finance from them and points to consider when preparing for an institutional raise following Angel investment.
If you would like to know more about Angel investment please get in touch.
*Data obtained from The UK Business Angel Market 2020 report provided by the British Business Bank