Business angels (BAs) are private individuals who invest in start-ups and young companies with good growth prospects, in exchange for a share of the company’s equity. Most BA investments range between £10,000 and £750,000.
BAs are free to make investment decisions quickly and often specialise in particular industrial sectors or local companies. Many take an active role in the businesses they invest in by advising and mentoring the management.
This guide explains the characteristics of BA investment compared to other forms of funding, how to find the right BA for your business and convince them to invest. It also provides details of BA networks in both the UK and Europe.
Table of Contents
Business angels and how they operate
Business angel (BA) investment is a form of venture capital funding where private individuals invest in companies in exchange for a share of their equity. Most BAs invest between £10,000 and £750,000.
There are almost 300,000 active BAs in Europe, and 16,500 of these are members of BA networks of varying sizes.
How BAs invest
BAs usually invest in start-ups or young businesses needing to fund activities such as product development or market expansion.
Many such investments offer potentially high returns but also involve high risks. A BA investment can often result in the total loss of the amount invested, while other investments may provide a cumulative return of 50 per cent or more.
BAs can make investment decisions quickly but will still need to see that you have a good business plan before they commit. Many specialise in particular industries, making them a potentially valuable source of expert knowledge and even mentoring.
Government match funding
The government provides some funds to match BA investments, such as Enterprise Capital Funds (ECFs).
ECFs can be used by small and medium-sized enterprises (SMEs), looking for up to £2 million of combined private and public sector equity finance. You can find out about ECFs on the Department for Business, Innovation & Skills (BIS) website- Opens in a new window.
Finding a business angel
BAs may not make investments regularly and it could take you several months to find a suitable investor. You can look for a BA through networks such as the British Business Angels Association (BBAA), EBAN or the Beer & Partners group.
Advantages and disadvantages of business angel funding
Before approaching a business angel (BA) for investment, you should consider whether other forms of finance could better meet your organisation’s needs. For other sources of alternative funding, see the page on alternatives to equity finance in our guide on equity finance.
Advantages of business angel financing
The advantages of BA funding for your business can include:
- BAs are free to make investment decisions quickly
- no need for collateral – ie personal assets
- access to your investor’s sector knowledge and contacts
- better discipline due to outside scrutiny
- access to BA mentoring or management skills
- no repayments or interest
Disadvantages of business angel financing
The disadvantages of BA funding for your business can include:
- not suitable for investments below £10,000 or more than £250,000
- takes longer to find a suitable BA investor
- giving up a share of your business
- less structural support available from a BA than from an investing company
Venture capital funding
Venture capital companies make larger investments than BAs – typically over £3 million – making them suitable for bigger companies with more complex plans.
They are likely to have a more formal relationship with the businesses they invest in and to build exit procedures into agreements. Due diligence for venture capital investments can also be more expensive for your business and take longer than with BA deals. For more information, see our guide on venture capital.
Securing business angel investment
Before you apply for business angel (BA) investment, you should make a shortlist of potential investors you feel would be a good match with your company.
For more information, see the page in this guide business angel networks.
Making your business investment ready
Your business should be investment ready before you apply for funding. This means preparing a thoroughly researched business case, including a realistic valuation of your company’s worth.
You should provide:
- audited accounts for the past two years
- evidence of current performance
- profit-and-loss forecast for next year
- business bank statements for the past six months
- profiles of each partner or director in your business
Pitching to business angels
Business angels are more likely to be interested in your proposal if they:
- understand the product or service
- have worked in the same industry
- are confident your business is well managed
- feel they can bring added value to your business
- are not being asked for a huge investment, or repeated investments
When pitching your business plan to a BA you should cover:
- the benefits they would gain by investing
- details of the investment required
- terms of the proposed deal – eg share of control, skills you offer and timescale of investment
- the ability of your management team to implement the plan
Finalising the BA investment deal
It can take several months to finalise BA deals legally and for funds to be transferred. You should also allow for additional finance to cover legal fees and bank charges to arrange debt.
Legal elements of BA deals include:
- shareholders’ agreement – relationship between the shareholders
- subscription or investment agreement – terms of the share subscription
- service agreement – eg employment contracts with managers or directors
- other contracts – with more junior employees, suppliers, or customers
- disclosure letter – details of any warranties or assurances agreed between the parties
- memorandum – list of company’s powers – eg to borrow money – and the amount of share capital
- articles of association – company’s internal regulations
- share options – eg giving tax-advantaged share options to new or existing employees under the government’s Enterprise Management Incentive (EMI) scheme
For more information see our guide on how to secure equity investment.
Read about the EMI scheme on the HM Revenue & Customs (HMRC) website – Opens in a new window.
Business angel networks
You can find individual business angel (BA) investors, or syndicates, through BA networks in the UK and Europe.
BA networks include:
- British Business Angels Association (BBAA)
- Beer & Partners
- European Business Angel Network (EBAN)
BA networks help companies find an investor who is right for their funding needs. They also give investors details of companies they might want to invest in.
BBAA
The BBAA is a trade association for BA investors, promoting early stage investment in UK companies by bringing together investors and companies looking for funding.
BAs, venture capital networks, and associate organisations such as solicitors and accountants pay membership fees to join the BBAA but the service is free for companies seeking investment.
Find out about finding a BA investor on the BBAA website – Opens in a new window.
Access a list of angel investment networks on the BBAA website – Opens in a new window.
Beer & Partners
Beer & Partners is an organisation that puts BA investors in touch with small and medium-sized (SME) businesses seeking funding. They can also provide advice on:
- funding strategy
- investor meetings negotiations
Find information on accessing BA investment on the Beer & Partners website – Opens in a new window.
EBAN
EBAN is the European Trade Association for BA investment and seed funds. The organisation comprises over 250 BA networks and around 20,000 individual investors.
The organisation offers membership packages to individual BAs, BA networks and other associated organisations.
Find out about BA investment networks on the EBAN website – Opens in a new window.
Other BA networks
Other independent BA networks, offering investment opportunities and advice include those serving specific areas, such as London or Wales, or specific sectors, such as film. You can find these networks by searching online.
Here’s how I found a business angel to invest in my business
By the start of 2003, London-based design consultancy d3o lab had patented d3o, an innovative shock-absorption material, and wanted to start manufacturing and selling the product. But founder Richard Palmer needed finance so he could fully exploit the opportunity. Here’s how he did it.
WHAT I DID
Examine the business’ needs
“We developed our product, d3o, to a stage where it had great potential as a highly lucrative technology. However, we needed to get additional finance into the business to manufacture, sell and promote the product. In identifying our preferred funding route we thought carefully about our priorities, such as the amount of funding we required, any security we may need to provide and the amount of day-to-day involvement investors would require. Business angels tend not to require security and, having decided that we needed a substantial investment without having to cede too much day-to-day control, we decided that business angel funding was ideal for our business.”
Refine our business plan’s presentation
“We had already prepared a business plan, but we refined it by including sections detailing how the business angel finance would develop the business and what involvement potential investors might have. We also spent time on the plan’s presentation – ensuring it was focused and professional – to demonstrate our commitment. This stage was vital. A tailored business plan clarifies what the benefits of the investment are for both parties and specifically what the funds will be used for – and what they will achieve.”
Secure the funds
“Armed with our business plan, we contacted the British Business Angels Association who introduced us to several business angels. As a small but growing business our choice of angel was based largely on the sort of practical assistance they were offering. We then pitched our proposal to a shortlist of investors and tried to show them the benefits of their involvement – both for them and for us.
“One investor – David Richards – decided to invest after our first meeting with him. To secure the funds, we negotiated issues such as our respective responsibilities and growth targets. Finally, our legal adviser helped to negotiate the investment terms, such as our financial forecasts, which helped our investor complete his due diligence checks and agree the deal.”
WHAT I’D DO DIFFERENTLY
View investment as an ongoing process
“When I was initially pitching for investment, I was trying too hard to make the business cash-positive in one single stage. Had I appreciated that the business would develop and grow in value so quickly, I would have outlined my longer-term investment requirements more strategically.”
Allocate more time to the project
“It takes a long time to secure any form of finance and it’s no different in the case of business angel finance. If we had known at the start just how much time and effort it takes, I would have spent more time preparing an investment strategy at the outset.”
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Every effort has been made by the author(s) to ensure this article’s accuracy but it does not constitute legal advice tailored to your circumstances. If you act on it, you acknowledge that you do so at your own risk. We cannot assume responsibility and do not accept liability for any damage or loss which may arise as a result of your reliance upon it.
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