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The equity trade-off needed to make business angels right for your firm


About £1.5 billion is invested in UK firms each year by ‘business angels’ – usually during the start-up phase, but sometimes in established companies with an opportunity to grow rapidly, according to the UK Business Angels Association (UKBAA). 

Angels are usually successful entrepreneurs, seeking to share some of the rewards of their own success and the benefit of their experience in exchange for equity. Company owners will have to choose how much of their business they are prepared to give up. But, in many cases, the advice, support and contacts that angels can offer owners prove to be at least as valuable as the cash. 

Their presence as investors or board members may also make it easier for the company to attract further finance in future, although entrepreneurs will also need to be comfortable allowing others to influence how they run their business. 

“If you find the right angel, or group of angels, what you get, along with risk capital, is advice and support to help you get to the next growth stage,” says Jenny Tooth, Chief Executive of UKBAA. “But it isn’t for the faint-hearted, and it’s not easy money.”

Use of business angels is now more extensive in the UK than anywhere else in Europe, in part because it is supported by tax relief schemes. Angel investments vary in size from a few tens of thousands of pounds to seven-figure sums. Most are made by investors working in groups or syndicates. Angels will expect to sell the equity they receive in the company at some point within five to 10 years, when the business is sold, or possibly when it attracts larger-scale investments from venture capital firms. 

Right angel

Finding angel investors is getting easier, because there are now so many groups and networks of angels across the UK, along with resources provided by organisations including the UKBAA and the UK Angel Investment Network. Additional support may come from start-up accelerator and incubator organisations, while using crowdfunding can also help bring your business to the attention of potential investors.

But the real challenge can be finding the right investor. This may be harder for some than for others.

Peter Cowley is Chair of Equity Finance in the FSB’s policy unit, and has invested in more than 60 companies as a business angel after several decades as an entrepreneur.

He was named UK Business Angel of the Year in 2014 and Best Angel of the World by the World Business Angel Investment Forum in 2017, and now runs, using advice and anecdotes to help entrepreneurs and angels work together. He says many angels prefer to work only with firms in the same geographic area, as this makes it easier to perform due diligence and support the business on its journey.

But angels are not distributed evenly across the UK. On average, more than 90 per cent of the investments made by business angels in 2016 went into firms based in south-east England, with London alone accounting for an average of 58 per cent, according to research commissioned by the UKBAA and the British Business Bank (BBB). 

The UKBAA is trying to address these regional inequalities, and has created Angel Hubs to improve access to angel networks in different regions. At the time of writing, there are hubs in Cambridge, Bristol, Leeds and Belfast, with others planned. The UKBAA website also has a directory of business angels.

Another problem is the lack of female business angels, says Professor Nelson Phillips, Abu Dhabi Chamber Chair in Innovation and Strategy at the Imperial College Business School. No more than 10 per cent are women, according to the UKBAA/BBB research. “Female entrepreneurs face particular challenges, so having a woman angel helping can be important,” says Mr Phillips. 

There are some angel networks dedicated to supporting female entrepreneurs, including Investing Women and Addidi Angels. The UKBAA is also seeking to address this issue, 
as is FSB, through support for the #SheMeansBusiness, Women in Enterprise and 100 FSB Women campaigns. 

Standing out

Even if a business owner finds angels they want to work with, how can they make their business look an attractive investment? Mr Cowley says most angels invest in people rather than business ideas. “A great idea with a poor team will go nowhere, but a poor idea with a great team will go somewhere, because they’ll pivot to do something else,” he says. 

Angels will want to see proof of the potential for growth. “They will look closely to see if this is the kind of business that can scale,” says Ms Tooth. “What makes your business stand out? Can it get a good share of the market?” 

Mr Cowley says he looks for entrepreneurs who understand how much it will cost to acquire customers and what value those customers will deliver over the lifetime of the relationship they have with the business – in terms of gross margin, not revenue. 
Each angel or group of angels will have slightly different criteria. Some focus on specific industries. Some will make only investments that are eligible for tax relief, so business owners should also investigate whether the firm meets eligibility criteria for the Enterprise Investment Scheme or Seed Enterprise Investment Scheme.

Risky business

Even if the business looks great and the relationship with the angel investors is harmonious, success is never guaranteed. Northern Ireland-based business angel Mervyn McCall has invested in 10 businesses during the past decade. “Three have failed, two or three I’ve got big hopes for, and a few are pegging along,” he says.

“The failures are almost always down to the entrepreneur or the management team. In some cases it was a fantastic product, but the market wasn’t prepared to pay for it. In most cases it could have worked, but the management team didn’t have the wherewithal to make it work.”

But plenty of businesses have benefited hugely from using angel investment. Vantage Power, in which Mr Cowley has been an investor and board member since 2012, designs and manufactures powertrain electrification and connectivity technologies for heavy-duty vehicles. 

Founder and Chief Executive Alex Schey says he has appreciated working with investors who are direct and honest, although working with angels has also meant making difficult decisions. He recalls two potential investors telling him, during a funding round, that they thought the business had great potential but was over-valued. 

“They wanted us to drop the price by 25 per cent,” he recalls. “It was a strong-arm tactic, but we decided to take the deal. We ended up with two phenomenal investors who gave us a significant amount of time. Working with business angels is one of the best decisions we’ve ever made.” 

Cloud funding

Simply Do Ideas produces cloud technology services that help organisations harness, develop and monitor the progress of good ideas. 

In March, the company announced the result of its latest funding round, for which a group of business angels joined forces with the Development Bank of Wales to raise £550,000. 

The company was founded by Lee Sharma in 2015 and benefited at an early stage from the support of lead angel Ashley Cooper, who is now its Chairman. 

Mr Sharma stresses the importance of a smart investor who can provide the support the company needs. “You’re going into a relationship with individuals who can give you the benefits of industry experience, business experience, or connections to other potential business opportunities,” he says. “But it should be a two-way process, because you’re giving them the opportunity for them to make lucrative returns.”

Mr Sharma believes each of the company’s investors brings something different to the business. “They’ve been there and done that. They can help you navigate the issues you face. That’s valuable. I’ve got no regrets about going down the angel investment route – it’s been brilliant for us.” 

Could you be an angel? Do your research first

UKBAA has developed a complete online training programme for aspiring angel investors. “Anyone with a reasonable amount of spare financial capacity and extensive business expertise could think about doing this, to help back Britain’s entrepreneurs,” says UKBAA Chief Executive Jenny Tooth. “It can also be a better way to invest your money than lots of other ways are at the moment.” She is particularly keen for more women to become business angels. 

But success in business does not guarantee success as an angel investor. 

“I would recommend that anyone considering this joins a local angel group and gets to know some other investors before they dip their toes in the water,” says Professor Richard Harrison, chair in entrepreneurship and innovation at the University of Edinburgh Business School. 

Peter Cowley, an experienced business angel and Chair of Equity Finance in the FSB’s policy unit, advises angels to work towards creating a portfolio of at least 20 investments. “There’s so much luck in this,” he says. “You’ve got to be able to allocate some cash that you don’t mind losing. If you have a reasonably sized portfolio over about seven to 12 years, you may get a 20-25 per cent return on your investment, on average, per year. But you could lose it all.”