Business angels are wealthy individuals who invest in start-up and growth businesses in return for equity in the company. The investment can involve both time and money, depending upon the investor.
Typically, business angels have already made their fortune through other business ventures, possibly their own start-up or a career in business. Most are men aged between 45 and 65. However, investors can be younger – particularly in the technology sector. Business angels can operate independently, but many work as a syndicate. This is because the majority of angel investments make a loss.
Research by the National Endowment for Science, Technology and the Arts (NESTA) and the British Business Angels Association (BBAA), which reviewed 1,080 angel investments, found that angels lost money in 56% of deals. To avoid losing a lot of money on one big deal, an investor needs to make a number of investments and spread the risk.
More than half of the investments in the study were directed at very early stage, pre-revenue start-ups – ‘the riskiest time of a company’s life’, says NESTA.
However, the higher risk associated with investing in early-stage businesses can potentially be rewarded with far greater returns if the business takes off and its valuation soars. According to the research, 9% of the deals generated more than 10 times the capital invested. Meanwhile, the average rate of return for successful deals was 22%.
The BBAA estimates that business angels invest roughly £800m every year. BBAA research has also indicated that business angels invest more in early-stage businesses than formal venture capital (VC) funds.
The term business angel covers a wide range of individuals investing varying amounts of money at different stages of business development. In general there are six different types of investor:
Virgin. Has not yet invested
Latent. Has not invested in the past three years
Wealth maximising. Experienced businessmen and women investing for financial gain
Entrepreneur. Backs businesses as an alternative to stock market investments
Income seeking. Invest for income or to gain a job
Corporate. Companies that make regular investments, often for majority stakes.
What can business angels offer?
Business angels are a vital tool used to fill the gap between venture capital and debt finance – particularly for start-up and early-stage companies. They also provide a useful source of equity finance for relatively small amounts that would not otherwise be available through venture capital.
According to the BBAA, angels typically invest between £10,000 and £750,000 in a company. On average, business angels in the UK invest £42,000, and each investor makes around six investments. Where larger amounts are invested in a business, this usually takes place through a syndicate of angels organised through the entrepreneur’s personal contacts or a business angel network.
The BBAA / NESTA research found that co-investments were the preference for investing in start-ups, with on average five angels co-investing in any one round. Most syndicates will have a lead investor, who is often referred to as the ‘archangel’. In addition to a first investment, business angels often follow up with later rounds of financing for the same company.
As well as cash, business angels can offer years of experience in the business world, not to mention useful contacts to help you grow your business, which can add real value to your company.
Although some prefer to become a sleeping partner, others will get actively involved in your business, offering help with anything from writing a marketing plan to taking the company through a flotation on the stock market. Indeed, the BBAA / NESTA report recommends that angels invest in their area of expertise and stay connected with the business, preferably at board level, as a way of improving the success rate of angel deals.