Everything You Need To Know About Attracting Angel Investment

Angel investors may be a term used by the startup community, but they were first coined as such for being the lifesavers of Broadway productions.

When no one else wanted to invest in theatre or the arts, and plays were being shunned by traditional investors such as banks, angels would often swoop in to save the productions. Angels expect a financial return on their initial investment, certainly. But, they are considered the most flexible, compassionate and fervent investors in the ways they use their leverage, expertise and connections to help steer projects they believe in.

Fortunately for those of us who aren’t currently trying to launch a Broadway show – the interests of startup angel investors are wide-ranging and have expanded into many other business areas now too.

Guest Tips: Jenny Tooth OBE, CEO of The UK Business Angels Association (UKBAA)

Throughout this guide, we have insights from the CEO of UKBAA and equity finance expert Jenny Tooth OBE. Tooth has over 20 years of experience in supporting small businesses to access investment, both in the UK and internationally.

In this guide, we will cover:

What is an angel investor?
Advantages and disadvantages of angel investment
How to attract angel investors
What do angel investors look for?
Do angel investors like risk?
Questions angel investors may ask
The UK angel investment scene
Conclusion

What is an angel investor?

An angel investor is typically a single investor who seeks opportunities in businesses they find interesting and viable in a financial sense. They provide upfront capital to support the business’s goals and progress in exchange for an equity stake in the company, and they usually ask for between 10% and 25%, according to British Business Bank.

Angel capital may be provided one time or on an ongoing basis.

Similarly, it can be provided as a total lump sum or in instalments, depending on the progress of the business and whether or not targets have been met within the angels’ specified timeframes.

In general, an angel investor is likely to be:

A man aged between 45 and 65 (however, investors in the technology sector are likely to be younger)
A high net worth individual, having already made their fortunes through other business ventures, possibly their own start-up or via a career in business.
A risk-taker (but within certain parameters, more detail on this below)

As mentioned above, angel investing differs from other types of investments in the sense that it is likely to be a lot more intimate and personal, and more of a business partnership depending on the level of involvement your angel investor chooses to be part of in your company.

There is also however a secondary style of angel investment where they may choose to be a ‘sleeping partner’ or a ‘silent partner’ as opposed to being an active partner in your business.

Sleeping or silent angels

A ‘sleeping’ or ‘silent’ partner is an angel who decides to just provide capital to your business without having any additional input or providing any extra guidance to the business.

Although some business owners are looking for the additional benefits an investor can provide such as mentorship or guidance, there are multiple reasons why an angel may choose not to be involved in this way.

In some cases, they may just not have the time, due to other commitments or projects. Or, for example, if your business involves a new form of emerging technology, the angel may feel it’s better to let others closer to this niche use their expertise to determine the best moves for the business in general.

This can be beneficial to your entrepreneurial style if you’re the kind of person who prefers to simply obtain the funds and work alone without having to manage your angel investor in a business or stakeholder-style relationship.

Difference between angel investment and venture capital

Venture capital (VC, or a ‘venture capital fund’) is an investment fund made up of contributions from wealthy individuals or companies, who incorporate or give their money to a VC firm to manage their investment portfolios for them and invest in start-ups in exchange for equity.

The main difference between angel investors and venture capitalists is that VCs are typically comprised of a group of investors from a company rather than a single individual.

So which is the right option for your business? Read on to find out what advantages having an angel investor can do for you over venture capital.

Advantages and disadvantages of angel investment

As with anything, there are advantages and disadvantages to angel investment – and here is where it comes down to your individual preferences as a business owner as to what you’re looking for, and what would personally suit you and your business best.

Benefits of angel investment

One of the main benefits of angel investment is that you are more likely to have a lot more one-on-one time with the angel investor than you would with a firm of venture capitalists.

Potential drawbacks of angel investment

There are rare occasions when angel investors will invest in a business or company and for whatever reason there end up being serious personality clashes or value incompatibilities that both parties may have overlooked in initial consultations, or simply not have been able to see at the time.

This, just like a failing business partnership, can have serious effects on the business because both parties may want drastically different things for the direction of the business. This is certain to cause conflict and satisfaction since both parties will be so invested emotionally.

Most angel investors do their due diligence to try and ensure that this doesn’t happen, if it does it can be very detrimental and actually become the catalyst for the business to fail entirely.

Venture capitalist firms are typically in the business of investing day in and day out and they likely see it as a quite impersonal process carried out to make money, whereas an angel investor comes from all walks of life and it may not be their main career – they may simply have an interest in your personal business which allows them to have more passion and devotion to your specific industry or company.

This isn’t to say that angel investors don’t want their money back (and honestly, even more returns than what they initially put in), because that is always the goal for any kind of investor – but the process is slightly more personal with angel investment because you are very likely to have a direct line to them, and can go to them for guidance, to ask questions and manage their expectations personally in a way that could make the process much more enjoyable for both parties.

How to attract angel investors

Just the same as if you were pitching to a venture capitalist firm, you will need to know how to pitch. The two most important tools to do this are of course your business plan and your pitch deck.

Business plan fundamentals and pitching tips

Your business plan sets out what business you are in, or going into, and how you will get there. Of course, your plan will need to be reviewed as events unwind and revised as necessary from time to time, but ultimately it is intended to give your business a structure (defined by your vision, mission and over-arching goals) that the business can look to as their north star, and stand by no matter what storms may rock the boat.

Your pitch, is how you communicate your plan to potential investors, in the shortest amount of time, and in the most entertaining way possible. A pitch can include:

Your elevator pitch: a short summary of your business that is memorable enough to catch an angel’s attention and keep it
A pitch deck: A short visual presentation explaining the most important and valuable parts of business, for example your USP, any patents or emerging technologies you have invented or patents you have secured

Don’t know how to make a pitch deck? We have a guide for that –
using lessons from $1bn start-ups.

Networking and finding potential angel investors

When it comes to networking and finding potential angel investors, Tooth OBE has some wisdom to share:

“One thing you do need to remember is that you need to kiss a lot of frogs – you have to talk to a lot of angels. You need to find someone who understands your market or your sector.

A group of angels can see thousands of business plans in a year but only invest in, say, 20 of them. So we talk about 2%. You need to get down to that group. It’s about making sure that your business will tick all the right boxes.

Sometimes smaller events with a small group of angels in the room can be even better than big events with thousands of people. Don’t pay to pitch unless you are really offered additional value; in general, you shouldn’t be asked for money for pitching.”

The best place to start looking for angel investors is the web – there are a number of places that list potential angel investors and bring entrepreneurs and angels together, including:

What do angel investors look for?

By now you may be wondering what it takes to get one of these angels to be interested in you and your company.

The quality of you and your team

Well, since records began, it has been proven that the number one factor when angels were deciding whether to invest in a company has always been first and foremost, the quality of the entrepreneurial team and their skills and experience.

According to The 2020 UK Business Angel Market Report by the UKBAA, between 95% to 100% of Jenny Tooth OBE’s respondents said this was important, with most saying it was very important.

Tooth OBE has some guidance for us here:

“An investor looks for a great entrepreneur: the business comes after that.

For instance, [say I met you and] you’re a great entrepreneur but I’m not interested in investing in your sector, then I would be happy to introduce you to my colleague or another investor who might have an interest in this sector.

We look for bright, passionate, experienced business owners with a track record of achievements.”

Besides a great entrepreneur and team, investors will also consider things such as market opportunity (a situation in which a product or service, etc. has been proven to be wanted and needed by consumers), and scalability (a business’ potential to expand and grow, but most importantly have the infrastructure to deal with fast or unexpected increased demand) to guide their decision on whether or not to invest.

For a full list of questions angel investors may ask, and so you can have all your bases covered, here are the questions a savvy angel investor is likely to ask before handing over cash.

Potential impact on your business

Every grouping also placed importance on the potential impact the business could have, as well as the impact their investment would have globally. This was particularly prevalent in the (admittedly small, but very important) demographic of 21 angel investors between the ages of 18-34.

There was also a difference between genders on the importance of impact:

79% of female angels felt that ‘impact’ was important, while only 52% of males did.

Gender perception in angel investing

The perceived importance of gender within a business’s company structure brings up some striking differences in responses:

55% of females stated gender was important, compared to only 14% of males.

This is a significant unconscious bias that has been contributing to the investment gender gap, as it has been proven that 1) historically, angel investments are mostly male-founded teams, and 2) there is a correlation between the gender of angels and the gender profile of the founders they invest in.

Ergo, male-dominated teams will continue to work with other male-dominated teams, and male angel investors will have a subconscious bias towards male-owned companies by default unless these unconscious biases are challenged.

In Europe, it was identified that female investors also invest between 20-50% of their portfolio invested in similarly female-led teams, but whether this is also an unconscious bias or more of a conscious attempt to give women more of a chance from an ethical and empathetic standpoint. However, currently, this effort still is not enough to balance the disparities that have been in place for millennia overnight. The current investment scene is markedly male and will stay that way until there is a very intentional push for change.

A note from Tooth OBE:

“A group of angels can see thousands of business plans in a year but only invest in, say, 20 of them. So we talk about 2%. You need to get down to that group. It’s about making sure that your business will tick all the right boxes.”

A few other factors for what angel investors look for in a potential investment are:

(Source)

Due diligence

According to Tooth OBE:

“The biggest due diligence we investors do is on you. [We look at] what’s on your Facebook and LinkedIn, and we ask for references. The biggest thing we go after is you as we put our money and faith in you to execute the business and look after our money.

“What investors don’t like is a lack of transparency. If you have a loan, tell us about it, if you have smashed your credit cards, tell us about this as well. Don’t hide anything when it comes to your financial situation. Do you really have these customers? Do you really have these followers? You need to have evidence to prove this. Honesty is very important.

“If we found out that what you’ve told us isn’t true, then we’re unlikely to proceed.”

Due diligence is a mutual process: you’ll want to make sure your potential angel investor is credible too.

“Don’t be afraid to ask the names of other businesses the investor has invested in. If they are a real investor, they will be proud to talk about their investments and tell you about their portfolio. If you’re talking with a not-so-active angel, they won’t be able to reply to this question properly.”

Preparedness

Once again, expert wisdom from Tooth OBE:

“If all your ducks are in a row it could take six weeks to three months for the deal to go through; it’s normally down to the legal parts.

“Get yourself organised first, respond very quickly to investor questions, and make sure you look at legal templates to reduce the cost. You don’t want to be ripped off by a lawyer. It should be a very simple transaction and the speed will depend on the competence of the lawyer.

“You must be EIS and SEIS-eligible already. If you’re not yet, then make sure you are. Go on the website and get it done as that’s a big benefit. Most angel investors look for this!”

The more comprehensive your business plan can be at this point too, the better. This is the point where angel investors will want the fullest information they can possible get about everything to do with your business: all the ins-and-outs, the nitty gritty, in order to best be able to support you and to make sure for themselves that this is the best potential partnership opportunity for them, too.

Do angel investors like risk?

The answer to this question is: sometimes.

While most angel investors are risk-takers at heart – the entire premise of investing into a company that you can never tell for sure is going to provide you with returns is a risk – there are different types of risks and different levels of risk-taking.

Investors are people with different levels of risk tolerance, capital they are willing to put forward, and personal preferences at the end of the day. For instance, some investors may prefer very low-risk investments that will lead to slow but steady conservative gains, whereas others are all about the latest new trend and jumping on it before anyone else in order to capitalise on the explosion in popularity as soon as it hits.

Good risk and bad risk

Another way to look at risk-taking is as ‘good risk’ or ‘bad risk’.

Good risk might be considered investing in something new that has already shown great promise in an emerging market.

Bad risk might be an investor simply investing in the first thing that comes to mind without any prior knowledge or research, simply on an uneducated whim.

Entire companies or industries can be considered a bad type of risk for certain investors, depending on their aims and goals. For example, it would not be a good idea simply for image and reputation purposes if an investor who aimed to be a family-friendly pillar of the community was seen to be investing heavily in the adult entertainment or marijuana industries.

Risk assessment strategies

Angels typically use a few strategies to try and gauge levels of risk such as their own statistics and data, tracking the stock market and keeping up with the news regarding upcoming trends; but ultimately, determining what will be a good risk or a bad one is down to the individual preferences and experience of the angel investor.

As mentioned above, when it comes to what angel investors are looking for, we also determined that your personality and team can also have a huge impact on the attitude of an investor and whether they are willing to take a chance on you.

We’ve seen it on Dragon’s Den a million times over – the idea of: “your business idea is good, but we like you specifically” – and that concept works in so many more situations in life than you would think.

So if you can prove tenacity, courage, good business sense and the willingness to persevere, an angel investor may just be swayed by what you have to offer.

Questions angel investors may ask

However ‘nailed down’ the materials you put in front of an investor may be, they are sure to have some questions. Here are a few common questions that are worth preparing for. They might be a bit trickier than the expected ones – getting under the skin of your consumer insight, target market and what you are selling to your customers.

Tips from Ian Wallis

Currently Head of Startups at FieldHouse Associates, Wallis is a former business journalist and co-founder of Venturers Club, an entrepreneurs' network. He has spent more than 20 years writing about business owners for various outlets including Startups.co.uk, where he helped launch the original Startups 100 in 2008.

On people

What skills, expertise, experience and ambition do the team have that are relevant to growing the business? An investor is most wary of a business turning into a ‘lifestyle’ business – one that grows just sufficiently to pay a salary to the founder(s), but without the growth needed to deliver a return to the investors either from dividends or an exit. They will want to hear that the necessary ingredients are there to grow a business to decent scale.
What are your/your team’s weaknesses and how are you going about filling the gaps? Everyone has weaknesses. An entrepreneur insufficiently self-aware to recognise theirs will be a huge red flag to an investor. Where weaknesses are recognised, there should be a plan to compensate for them – not necessarily immediately, but some way down the line before they become critical.
What can I do to help? Not every investor will be up for helping, but you should know enough about your target to have thought about whether there is anything else, other than cash, that you would value.

On the market

Who is the real competition in this space? No investor believes those cliched matrix diagrams with a list of competitors and a list of benefits – where every benefit has a big tick under your product and loads of gaps under the competition. Even a product creating a whole new category has competitors, as every consumer could choose to spend their cash and time elsewhere. Be super critical and objective about your strengths and weaknesses and those of your competitors, both close in your space and beyond.
Who do you most envy? Some investors may get a little more creative in asking about the opposition, forcing you to look for and describe the positives in competitors’ offers.

On investment

How are you spending the funding? It shouldn’t be a surprise that an investor will be interested to know how you are planning to spend their cash. They deserve to see some reasonable detail for the next 12 months, as at least this is one area where the business is in control. They will generally be very wary of a high percentage being spent on salaries, particularly for founders. They will be pleased to see funds spent on new IP and on working capital to fund expansion.
What’s your ‘runway’ until your next round of investment and what can you prove before your next round of investment? A decent cashflow projection will show when the next round of investment will be necessary. An investor will be interested in what can be proven before the next investment round is started and what increase in valuation is therefore likely. It’s worth considering that it takes at least three months between starting an investment round and getting the cash in the bank. So if the cash is needed in 12 months’ time, there will only be nine months to create the proof points. And maybe you won’t launch your product for six months. So what can be achieved in the three months left? This is where you might need to get creative. For example, maybe a retailer should create a pop-up shop to start proving demand whilst the real shop is being kitted out, or maybe business with a new product would need to express manufacture some product even if the costs would be unsustainable in the long run.
How do you justify your valuation? There are many ways to consider a valuation. The more objective the rationale, and the more benchmarks that can be referred to, the better. If things get sticky, it’s useful to turn this question back to the investor and ask them how they would go about valuing the business?
Where are the risks? An investor is likely to be looking for reasons not to invest and stress testing those. You can help them and yourself by identifying the risks and describing the actions being taken to mitigate them.
Have you got your SEIS/EIS advanced assurance? A super simple one to finish off. Having your SEIS3 or EIS3 already processed will give an investor confidence that you fulfil the criteria and are buttoned around the administration of your business. So best get ahead and sort this out as soon as you think about raising funding, as HMRC will take a few weeks to process the application.

The UK angel investment scene

Dragons’ Den has popularised the notion of seeking money from angel investors.

But what is an angel investor? While many know the faces of Duncan Bannatyne, Peter Jones, Deborah Meaden and a clutch of other successful entrepreneurs to have appeared on the show, there are 18,000 more of them out there.

Examples of UK angel investors

The UK Business Angels Association estimates that these 18,000 business angels privately invest an average of £850m each year (more than two and a half times the amount of venture capital invested in a typical year).

In recent years it has been running its ‘Be an angel’ campaign. This is designed to encourage more people with high disposable incomes, or accumulated wealth, to consider the merits of becoming an angel investor.

If you’re on the hunt for angel investors in the UK, then there are a number of places that list potential angel investors and bring entrepreneurs and angels together, including:

UK startups that began with angel investment

Some of our recent 2023 Startups 100 alumni kickstarted their businesses with angel investment, including:

SURREAL – After raising some serious funding via angel investment; SURREAL’s high-protein cereal brand (all based on popular childhood products, with frosted, cocoa, and peanut butter flavours), are now listed in Holland & Barrett’s after just one year in business. SURREAL have plans to launch in a further national retailer in 2023.
Pushfar – Since launching in 2018 with angel funding, Pushfar, an innovative career development platform that matches mentors with mentees, hasn’t just been supporting individuals. Enterprises are taking advantage of its platform too, with Samsung, Multiverse and Sodexho among its impressive client list.
Wild – Wild has come a long way since its initial angel investment. The eco brand has been encouraging consumers to ditch single-use plastic from their bathrooms with a sustainable product line since 2019, and has garnered a passionate user base. The company recorded 400% year-on-year growth in 2021, selling over 2.5 million deodorants. And earlier this year, it celebrated a huge £5 million investment that has helped it move one step closer to its ambition of every UK household using Wild deodorant, instead of throwaway plastic.
UniTaskr – The platform, launched in 2017, connects students to jobs. UniTaskr has been able to collaborate with many high-profile brands, including Uber, Spotify, Red Bull and Universal Media Group since securing their angel investment.

(View our full Startups 100 Lineup 2023)

Conclusion

In summary, there are many potential benefits to UK small businesses that are interested in trying to seek out angel investment. And, the most exciting part that most people overlook is that angel investors are out there seeking you and your business, too. With the right guidance as displayed in this guide, and your own tenacity and determination in finding the right angel for you, a partnership like this between an investor and your business could truly be a match made in Heaven.