Business Angels are private individuals who invest in start-ups and early stage businesses with good growth prospects in exchange for a share of the company’s equity.
Business Angels use their own money to invest in businesses they like the look of, either directly or through a business angel network. They have often previously run successful businesses of their own and may specialise in ventures in particular industrial sectors or local areas. Many take an active role in the businesses they invest in by advising and mentoring the management. There are around 300,000 active Business Angels in Europe, of which around 18,000 are members of Business Angel networks.
How much do they invest?
Start-ups and early stage businesses with high growth potential which need to fund activities such as product development or market expansion and which would benefit from the advice and contacts a Business Angel can offer as well as their financial investment. Business Angels typically invest between £10,000 and £750,000 (typically investments are EIS or SEIS assured to reduce risk).
Advantages
There is no need to put up security in the form of personal assets to secure investment. A successful arrangement with a Business Angel can help your business grow at a much faster rate than would have been possible without them. As well as funding, Business Angels can bring valuable skills and expertise to your business and provide useful business contacts. While the financial arrangement is similar to that with a venture capital firm, there is usually a less pressured environment with a Business Angel, who can be more flexible than a VC about the need to exit the business within a rigid time frame.
Disadvantages
Business Angels are not under any particular pressure to find investments which means it can take several months to find one interested in investing in your business. As Business Angels generally operate alone, they will usually come with less structural support than a venture capital firm would provide.
Things to consider
Because Business Angels are individuals, the relationship between a Business Angel investor and the venture they are investing in is a very close and personal one. So it is vital to ensure that the two sides get along, can work well together and have the same aims and approach to get the most out of the relationship.
The practicalities
Before approaching a Business Angel make sure you have a realistic and well thought out business plan to present to them. Decide what makes your business special, how you will be able to grow the business, and why they might be interested in investing. Work out how much money you need to achieve your goals, then decide how much equity in the business you are willing to offer in return for the investment.
You should also take independent expert advice on how to value your business. This might be based on comparison to similar businesses, the value of assets in the business, or by using discounted cash flow analysis.