How to find and nurture relationships with angel investors

What is angel investment?

Angel investment is a form of finance for small businesses and start-ups. 

It differs from a standard business loan in that it involves a so-called angel investor providing initial seed finance or growth funding for start-up businesses, 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 will have to share any profits made according to the percentage share of the business you agree to sell.

What is an angel investor?

Angel investors are normally wealthy individuals who are seeking investment opportunities they believe can earn them a better return than they could get from savings accounts or investment funds.

They may wish to be silent investors who are not involved in running the business – either via a one-off cash injection or an ongoing funding arrangement.

They search for interesting start-up businesses into which they invest their own money in return for a share of the equity. In some cases, angel investors also want to be actively involved in the businesses they finance, often in an advisory role.

How can I find angel investors?

Some entrepreneurs have friends or family members they can turn to for angel investment. However, if that’s not the case, you’ll need to form connections with angel investors to attract both their interest and their cash.

You may be able to find angel investors for your business if you:

• Attend professional networking events – angel investors often attend events relating to the sectors or industries that interest them

• Go to pitch events/competitions organised by angel investment organisations such as the UK Business Angels Association

• Search online angel investor directories and lists for suitable investors

• Contact local businesses that have worked with angel investors in your area/sector

5 top tips for attracting angel investment

• Don’t waste time contacting angel investors who do not invest in your sector

• Send out personalised communications to angel investors you believe may be interested in your business – group emails will rarely yield results

• Tailor your offer to the specific investor’s interests and investment aspirations

• Follow up promising meetings promptly to reinforce your key messages and your desire to work together

• Take your time finding the right investor – and build a relationship with them before asking them to invest

What do I need to approach an angel investor?

Preparation is one of the key's to success when it comes to angel investment. You need a compelling pitch that illustrates your commitment to building a successful business. You also need to be open and honest about your ambitions and investment requirements.

On a financial level, you also need to have managed your HMRC obligations and be able to provide evidence – including business bank account statements – demonstrating your current situation (turnover, profit, sales and growth) or plausible forecasts of those figures if your business is yet to get off the ground.  

To secure the investment you need, it’s also important to have a clear idea of:

• Exactly how much you need

• How you plan to use the money

• How you expect the investment to impact your business 

Dos and don’ts when approaching an angel investor

Angel investors look to invest in you as much as your business, so it’s vital to make a good impression personally as well as professionally. Here are some pointers to get you on the right track.

Do

• Research your target investors to ensure their interests are aligned with your business

• Develop a solid business plan before seeking investment from angel investors

• Be open and honest – angel investors value transparency, so there’s no point trying to hide things

• Work hard on your pitch presentation – telling a story is a good idea, as long as it’s backed up by facts and figures

Don’t

• Bombard potential investors with unsolicited emails that are more likely to annoy than impress

• Share sensitive information that could jeopardise your business if in the wrong hands

• Put pressure on investors to make a quick decision – you both need time to consider your position

• Ignore investors who reject your proposal – they may be a gateway to other investors or want to invest in the future

How do I nurture my relationship with an angel investor?

Nurturing angel investor connections is an ongoing process that requires you to stay in regular contact with the individual or individuals who have invested in your business.

You will generally need to provide periodic updates on your progress and keep your investors informed of any challenges or opportunities that arise. Beyond that, the level of involvement you have with angel investors will depend on their expectations. 

For example, if your investor wants to take a hands-off approach, financial updates and occasional meet-ups may be sufficient to maintain a healthy relationship.

But if your investor wants to be involved in the business, you may need to stay in much more frequent contact.

This isn’t always a bad thing, particularly if your angel investor can provide valuable industry insights and expertise. 

Either way, it’s also sensible to ask your angel investor for feedback from time to time to ensure your goals and vision remain aligned.

Pros and cons of angel investment 

Angel investment can be an invaluable boost for start-ups and small businesses, but it is not suitable for all companies. To help you make the right decision for your business, here are some of the main pros and cons:

Pros

• You don’t have to repay the money invested as you would with a conventional business loan or finance agreement

• Angel investors are generally prepared to take a higher level of risk than banks, meaning you might get angel investment even if you can’t get a loan

• The terms are often more favourable than you could get from a bank or other lender

• Your business is more likely to succeed if you can convince an angel investor to take a chance on it

• You can often benefit from the investor’s expertise, experience, and network 

Cons

• You have to be prepared to give up a stake in your business, meaning you will share any future profits and will no longer have complete control of the decision-making process

• You may also have to accept the investor’s recommendations regarding subjects such as product development

• Angel investors sometimes put pressure on small businesses to grow faster than they would like

• The eligibility and verification process required to secure funding can take a long time

Is angel investment right for my business?

Angel investment could be the right choice for your company if you:

• Are a start-up or profitable early-stage business

• Have a turnover of under £5 million

• Are seeking finance of between £15,000 and £500,000

• Have a clear growth strategy for your business

• Are willing to hand over a share of your business

• Are prepared to accept advice and guidance from your investment partner

If your business does not meet these criteria, you will probably be better off with an alternative form of funding, such as a business loan or an invoice finance agreement.