How to find an angel investor to fund your startup business
Angel investors provide startup funding in exchange for a stake in your business, with payback only expected if you succeed. Is it the right choice for you? Our short guide explains.
Key takeaways
Angel investors provide initial seed funding or growth capital to startup businesses, usually in return for a minority stake in the company
They often take a punt on startups that would struggle to get a business loan under normal circumstances
Angel investors are the largest providers of funding in startups and young, growing businesses in the UK
While some angel investors are happy to be silent partners, others want a hands-on role in running the business
These unsecured and secured loans could help you grow your business, cover running costs or even fund a new company.
What is an angel investor?
Also known as business angels, these individuals offer an alternative to business loans or self-funding.
They are typically affluent business people looking to earn better returns than those available from savings accounts and other traditional investments.
While some angel investors invest alone, many join together as syndicates. This enables them to pool their resources and support startups they believe in.
The stake angel investors want in a business depends on how much they invest but is generally between 10% and 25%. The investment offered in return can be anything from £5,000 to £500,000, or even more in some cases. They typically aim for a 10-fold return within approximately six years – hoping, for example, to turn a £100,000 investment into £1 million.
Read more: Alternative ways to fund your business
How does angel investing work?
Angel investment can offer a one-off cash injection or an ongoing funding arrangement. Either way, it’s usually in exchange for ownership of an equity share in the company.
As the recipient, you don’t have to repay the money invested. But you do have to share any profits made according to the percentage of the business you agree to sell.
This means you only start paying off the angel investor if your business idea succeeds.
However, it also means giving up some control of your business idea – especially if your angel investors want day-to-day involvement in the company's management.
There are ways to manage your business's relationship with an angel investor, but much depends on the type you choose. While some angel investors are happy to be a silent partner, others prefer to take a hands-on role in running your small business.
As business angels usually plan to get their money back within five to eight years, taking on angel investment may also mean selling your company – or listing it on the stock exchange – when you reach that stage.
What are the pros and cons of angel investment?
Angel investment can be a great way to take your business dreams to the next level. But it can also be an expensive way to finance a business in the longer term – especially if your company flourishes.
If your angel investors insist on getting involved in running the company, it can also prove a lot more frustrating than simply taking out a start-up loan.
Is angel investment the right business funding source for your company? Here are some of the main pros and cons:
Advantages of angel investment
The money you receive is an investment rather than a loan – so you don’t have to pay it back in instalments
An angel investor may agree to invest in a high-risk business that would struggle to get a loan, providing they see growth potential
Angel investment terms are often more favourable than you could get from a bank or other lender because there’s no interest to pay
Convincing an angel investor to invest in your business means it has a reasonable chance of success – business angels only invest in promising ventures
Your angel investor can use their expertise, experience and network to grow your business. They may also provide additional funding at a later stage if necessary
Disadvantages of angel investment
You must give up a stake in your business, meaning you have to share future profits and possibly all decision-making with your angel investors
Angel investors want to make a return on their investment, so they may push small businesses to grow faster than they might otherwise choose
Most angel investors want an exit plan after a certain number of years, which may involve selling the company (unless you go public or can afford to buy them out)
The eligibility and verification process can be long and complicated – you can expect it to take at least two months and sometimes a lot more
How can I find angel investors for my startup?
Finding angel investor funding for startups is not always easy.
So, unless you have friends or family members who can become angel investors in your company, it’s best to target investors with a track record of supporting similar businesses to yours.
You need to connect with potential angel investors, and that’s easier if you’re working in the same field.
Here are some tips for attracting a business angel’s interest:
Attend professional events for the sectors or industries in which you want to launch a business
Enter pitch competitions organised by angel investment organisations such as the UK Business Angels Association
Search for suitable investors in online angel investor directories and lists
Get in touch with local businesses that already work with angel investors in your area/sector
Is an angel investor right for my business?
Angel investors look for startups they believe can expand quickly, allowing them to make a return on their investment in under ten years. This means they prefer startups and young companies with a low turnover and plenty of growth potential. As a result, business angels tend to invest in:
Startups or profitable early-stage businesses
Companies with a turnover below £5 million
Firms seeking finance of between £15,000 and £500,000
Businesses with a clear growth strategy
Companies who want money to fund a particular strategy, such as new product development
Organisations who are willing to sell a share in the business
Business people who are prepared to take advice and guidance from their angel investors
What are the main alternatives to angel investors?
Angel investment is not suitable for all startups, but plenty of other types of funding are available. The right choice for you depends on your sector and the conditions you’re willing to accept.
You must repay some types of funding in full. Others involve paying a return on the investment, just as you would an angel investor.
For startups, the alternatives to seeking an angel investor include:
Crowdfunding (including equity crowdfunding)
You can learn more about how these different types of business finance compare by reading our handy guides on how to get funding for a business and six easy ways to get business finance.
FAQs
What’s the difference between angel investing and venture capital?
Angel investing involves an individual or group of individuals; venture capital (VC) is early-stage business funding from an organisation or company. As such, VC generally involves larger amounts of money and can be more challenging to access. That’s one reason why it’s often sought by businesses that have already secured angel investment.
Do you have to pay back angel investors?
No, you don’t repay an angel investor in instalments like a business loan. You must, however, share any future profits with your angel investors – as well as the revenue you receive if you sell the business.
How much do you pay an angel investor?
How much of your profits you share with an angel investor depends on the agreement you make.
For example, if you convince an angel investor to pay £100,000 for a 10% stake in your business and your profits in the first year are £20,000, the angel will get a return of £2,000. But if your profits in year three hit £500,000, their share will grow to £50,000 and so on.
What percentage do angel investors usually take?
Angel investors typically take a 10% to 25% share of your business, which entitles them to the same percentage of any future profits.
About Jessica Bown
Jessica Bown is an award-winning freelance journalist and editor who has been writing about personal finance for almost 20 years.