What is angel investment? (and how can it help your startup)

First coined as a saving grace for struggling theatre productions, angel investment has spread its wings to the startup world, becoming a popular means of business finance for early-stage companies and entrepreneurs looking to turn their ideas into reality.

Today, angel investors do more than just write checks – they offer advice, share useful connections and help new businesses find their feet.

However, getting an angel investor on board isn’t as simple as having a good idea, as you have to know what they’re looking for and prove your business is worth backing.

In this article, we’ll explain what angel investment is all about, how it works and how your business can secure the funding it needs to grow.

What is angel investment?

Angel investment is when a wealthy individual – AKA an angel investor – puts their own money into an early-stage business in return for a share in the company (equity stake) or convertible debt (a loan that can later turn into shares).

Angel investors usually come in early, when a startup is still developing and might not yet qualify for a bank loan or venture capital. The name “angel” also comes from the fact that they often take bigger risks than traditional investors, backing entrepreneurs based on potential rather than financial results.

What’s the difference between angel investment and venture capital?

While angel investment and venture capital both involve investing money into a business, they’re actually quite different in terms of who’s investing, how much and at what stage. Here’s a quick breakdown of how they differ and what it means for your business.

Angel investment

• Comes from individuals  – often successful entrepreneurs or wealthy professionals
• They invest with their own money
• Usually invested at very early stages (such as the idea or prototype stage)
• Investment amounts are smaller – roughly from £5,000 to £500,000
• Often have a personal interest in mentoring and guiding the founders

Venture capital (VC)

• Comes from professional firms or funds made up of pooled money from many investors
• They invest other people’s money (for example, pension funds, insurance companies, large corporations, etc.)
• Typically invest in businesses that have traction, such as steady revenue or proven growth potential
• Investment amounts are much bigger – approximately from £500,000 to over £1 million.
• Usually want a significant return on investment (ROI) and expect more control

How angel investment works

Securing angel investment isn’t just about raising funds for businesses. Rather, it’s a process that involves a lot of preparation, pitching and ongoing support. For businesses, it’s about knowing what you need, connecting with the right investor and making sure you both get what you want out of the deal.

Here’s how angel investment typically works for businesses – from getting your business plan ready and perfecting your business pitch, to what happens after you secure the funds.

1. Pre-investment stage (preparing for angel investment)

Before seeking angel investment, you’ll need to be clear on your business idea and why you need the funding. This could be for product development, scaling operations, marketing or other growth-related needs.

From there, you’ll need to prepare your business plan and a pitch deck that clearly outlines your vision, product/services, target market, revenue model, financial projections and the people behind the team.

Pro tip: Make sure to do your research first, and only approach angel investors who have experience in your industry, or align with your company mission and core values.

2. Investment stage (negotiating the deal)

Once you’ve found the right investors, you’ll need to pitch your business. This is the moment to showcase your business’s potential and convince the investor that it’s a worthy opportunity. If they’re interested, you’ll then negotiate the terms of the deal. This includes the amount of investment, the equity stake the investor will receive and whether the investment is in the form of equity or convertible debt.

From there, a legal agreement is signed and the investment is made. This is when money is handed to the business, and the angel investor officially becomes a shareholder (or creditor, if it’s convertible debt).

3. Post-investment stage (growth and support)

After the investment, the business has access to more than just financial resources. Many angel investors actively mentor the company by offering advice and connections to relevant businesses, customers or even potential business partners.

During this stage, the business keeps the investor informed about progress, challenges and milestones. Moreover, with the additional capital and guidance, the business can work towards scaling, growing its customer base and hitting key targets/milestones.

Pro tip: Regular updates can help maintain a strong relationship and ensure the investor feels confident in the direction the business is heading.

4. Exit stage (providing returns to investors)

Over time, the business will work towards an exit strategy that benefits both the company and the investor. Depending on the nature of the investment and the business’s growth, the investor may exit through:

• Acquisition: the business gets bought by a larger company
• Initial Public Offering (IPO): the business goes public, and the investor can sell their shares
• Secondary sale: the business sells its shares to another investor or venture capital firm, giving the investor a chance to exit

The business also offers the investor a portion of the profits from the exit, which is usually a multiple of their original investment, depending on how well the business has performed.

Types of angel investors

Angel investors aren’t a one-size-fits-all deal. Instead, there are different types of angel investors you can find – each with their own preferences, approaches and investment styles. These include:

1. Classic angel

These are individuals who invest their personal wealth into startups. They usually have a background in entrepreneurship or business, and want to help young companies grow.

Investment style: classic angels tend to be hands-on or actively involved in advising the company, but they might not take day-to-day control.

2. Super angel

These are usually more experienced and have a larger personal wealth to invest compared to classic angel investors. They often have a track record of successful investments and sometimes invest in multiple companies at once.

Investment style: typically makes larger investments and might also be involved in mentoring and guiding the business more intensely.

3. Celebrity angel

These are well-known public figures, such as the investors on Dragons’ Den, successful entrepreneurs or industry influencers. They not only bring money to the table, but also their brand and reputation.

Investment style: they often invest in companies that match their personal interests or passions. Their involvement can help boost a business’s visibility and credibility in the market.

4. Corporate angel

People who work for large corporations or have ties to the corporate world. They tend to invest in businesses that either align with their company’s interests or their professional expertise.

Investment style: as well as funding, they might also provide development opportunities, partnerships and access to corporate resources.

5. Micromanaging angel

These investors are highly hands-on and prefer to be deeply involved in the companies they invest in. They often have extensive experience in the business world and may want to take an active role in operations.

Investment style: may have strong opinions on business decisions, including product development, marketing strategies or hiring. As the name suggests, their level of involvement is much more intense when compared to other angel investors.

6. Sleeping angel

On the flip side, sleeping angel investors (AKA silent angels) are more laid back and prefer to provide funding without getting overly involved in the day-to-day operations of the business.

Investment style: they trust the business to run on its own and typically don’t offer a lot of strategic input. They usually look for businesses that are already on a strong path to growth and don’t need constant guidance.

7. Impact investor

These investors are specifically focused on startups that are making a positive social or environmental impact. While financial returns are still important, the primary motivation is to support ventures that align with their values.

Investment style: impact investors may offer both financial backing and connections to help the business achieve its social goals.

8. Group angel (angel networks)

These are angel investors who come together to form angel networks or syndicates. Instead of making individual investments, they pool their resources to invest collectively in startup businesses.

Investment style: businesses can access a wider pool of angel investors, including funding and collective experience. Each angel in the network may provide a different level of involvement.

The advantages and disadvantages of angel investment

Angel investment can be a great way to fund a business, but like any form of financing, businesses should consider the advantages and disadvantages before looking for angel investors. 

The pros of angel investment

The advantages of angel investment include:

✅ Access to capital

Angel investors can offer a good amount of funding for businesses, especially those in the early stages that may find it hard to secure other types of capital. They’re also more flexible than banks and venture capitalists, allowing businesses to secure funds faster.

✅ Expert guidance

Many angel investors are either experienced entrepreneurs or business professionals who can offer useful advice and help you figure out ways to grow your business. They also bring valuable connections through new customers, suppliers or other potential investors.

✅ No repayment pressure

Unlike loans, angel investment doesn’t require repayment unless the business succeeds and is sold, goes public, or otherwise generates a return. This means businesses won’t have to worry about the pressure of regular payments or interest rates.

✅ Long-term relationship

Angel investors often see themselves as business partners, rather than just financial backers. That means they’re likely going to be more interested in seeing your business succeed than demanding immediate returns.

✅ Flexible terms

Angel investors are often more willing to negotiate the terms of an investment deal than venture capitalists. With this, you might find more favourable conditions that are tailored to your business needs.

The cons of angel investment

The disadvantages of angel investment include:

❌ Equity dilution

In exchange for their investment, angel investors require equity in your company, meaning you’ll own less of the business. This could affect your decision-making power, especially if you have a micromanaging angel investor.

❌ Influence on business decisions

While some angel investors prefer a hands-off approach, others may want a more active role. This could lead to conflicts or influence over important decisions if the investor’s vision is different from yours.

❌ Hard to find the right investor

Finding an angel investor who truly understands your industry and shares your vision can be challenging. A mismatch could lead to tension or end up slowing down your business’s progress.

❌ Limited funds for growth

Angel investors typically offer funding at the early stages of business. Therefore, if your company needs capital for growth later on, you may have to look for additional funding from other sources like venture capital or crowdfunding.

❌ Risk of losing investor interest

As angel investors expect a return on their investment, they’ll want to exit the business after a certain period. This could lead to pressure to sell, go public, or find other ways to provide this return on investment.

Tips to secure angel investment

Remember – landing angel investment isn’t just about having a great idea. It’s about being prepared, telling a convincing story and building the right connections. After all, angel investors want to know what they’re putting their money into, and that starts with how you present yourself and your business.

Here are some tips to help you make the best possible impression when pitching to angel investors.

1. Get everything in order

Before you even think about pitching, you need to make sure your basics are rock solid. This means having a clear, detailed business plan that explains exactly what your business is, how it’ll make money and why it’s going to succeed.

You’ll also need to know your financials inside and out, such as your current revenue, expenses, growth projections, how much money you’ll need and what you’ll spend it on. Additionally, make sure you cover legal requirements too, including registering your company, protecting any intellectual property and keeping important contracts in place.

Need help? Check out our guide on writing a business plan, with a free template included.

2. Create a strong pitch deck

This is a slideshow you’ll use to sell your idea. It should be short, sharp, and super clear (around 10-15 slides ideally). It also needs to tell a story; what problem you’re solving, how your product or service fixes it, who your customers are, how big the opportunity is, and how you’ll make money.

You should also show any proof that you’re already gaining traction (e.g. sales figures, user growth, revenue growth, etc.), explain who your competitors are and why you’re better, and highlight your team’s strengths.

Want to nail your pitch deck? Our guide to building an effective pitch deck has all the tips you need to stand out and win investors over.

3. Practice your pitch

When you pitch your idea, you need to be clear, confident, and easy to understand. Keep your explanations simple and avoid jargon, so anyone listening will know what your business is about.

Moreover, you should prepare for tough questions about your competition, customer acquisition, risks, and more. Practising your answers in advance will help you tackle those questions with confidence, giving you a better chance of investment.

Want to get your pitch spot on? Our guide to creating the perfect business pitch will walk you through everything you need to know.

4. Research your investors

Don’t just pitch to anyone who’ll listen. Instead, you should take the time to find angel investors who have experience in your industry, understand your vision and could bring valuable advice and connections – not just cash. A good investor fit can be the difference between a tense relationship and a real business partnership.

5. Nail the first impression

When you finally get in front of investors, first impressions are everything. Make sure to be enthusiastic about what you’re building, but don’t come across as desperate either. Remember to tell a story that’ll get them interested in your vision and make them want to be part of it. Plus, most importantly, remember to include how they’ll eventually make a return on their investment.

What can angel investors offer besides investment?

Investment is one thing, but angel investors bring much more to the table than just money. They also offer:

• Mentorship and expertise: they can provide valuable advice on business strategy, operations and overcoming challenges
• Industry connections: their extensive networks can offer connections to potential customers, suppliers, partners and even other investors
• Guiding on scaling: can help you through the complexities of scaling your business, refining your model or expanding into new markets
• Credibility and validation: having a respected angel investor on board can boost your business’s credibility
• Strategic direction: some will take an active role in guiding your business’s strategy, sitting on your board, or advising on key decisions
• Moral support: angel investors can offer emotional support and encouragement, especially through difficult times

Summary: is it right for you?

Angel investment can be just what you need to start your business effectively – giving you not just funding, but also valuable advice and connections. But is it the right move for you?

Before making that decision, you should consider how much equity the investor will take, the level of involvement, and whether they align with your vision and needs. You should also think about your long-term growth plans and how an angel investor might help (or hinder) that, as well as how you’ll eventually provide ROI.

There’s a lot to take on board. However, if you’re clear on your needs, ready for the commitment and can find the right investor, angel investment could be just what your business needs to get off the ground.