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At this week’s inaugural Cambridge Tech Week, there was a lot of emphasis on supporting our vibrant start-up community and helping them to scale and become the growth companies of the future.
This second instalment of our tech start-up FAQ’s looks at some of the questions we get asked about angel investing. Who are business angels and what do they do?
The likelihood is that you may have received some start-up funding from family and friends. This is typically how many start-ups get started and it can vary in amounts depending on your and your family’s networks. It’s often not particularly structured and can be either an investment for shares or a loan, in both cases on favourable terms.
Wealthy individuals, business angel groups and crowdfunding are all key sources of funding for early-stage businesses, but let’s focus on business angel groups.
There are many business angel groups around the country with some specialising in specific types of technology such as cleantech, health-tech or biotech. Business angels will often invest as small groups of individuals with a lead angel who co-ordinates and drives the transaction.
Most business angels are themselves entrepreneurs who have exited a business and understand the journey you are about to embark on, which means there are some good advantages to securing business angel funding, including:
- Business angels are free to make investment decisions quickly
- They almost always invest for shares, making it a much less risky funding proposition to say, debt funding
- They don’t generally require any personal security or other collateral from the founders
- The founders get access to their investors’ sector/industry specific knowledge and contacts, and also their mentoring and advisory skills
Some potential disadvantages to taking business angel investment might include:
- As it is high risk capital, you may be parting with a larger proportion of your business than you had hoped and no longer be retaining complete control of how you run it
- You might not find the right investor for you, which is key as this is a personal investment for the angels involved and you will need to develop a strong working relationship with them
Getting angel investment isn’t necessarily easy and doesn’t always happen overnight – it can take up to six months from approach to investment. You need to do your research and find out who you should be talking to. Make sure you are prepared when approaching angel funders – you will almost certainly be asked to pitch your business and to answer in depth questions about your team, your product/service (are they robust/defensible) and is the market for them real?
Another important issue to be aware of when raising money from business angels is that they will almost certainly expect the company, its business and their investment to qualify for the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS). SEIS and EIS are tax schemes designed to give investors making high risk investments generous tax reliefs, which helps to de-risk their investment and incentivise them to keep investing.