What is an Angel Investor?
Angel Investing is nothing new, in fact Angel Investing began back in the day with what was termed the “Theatre Angels” who were wealthy benefactors of Broadway who contributed much needed capital to get new theatre productions up and running and onto the stage. In exchange, these champions or “Angels” received a share of the production’s profits.
What exactly is Angel Investing and who can become an Angel Investor?
How does “Angel-ing” work as an investment strategy?
An Angel Investor tends to be an affluent individual who provides capital for a business, in exchange for a relatively decent interest rate or ownership equity.
Angel Investors are very often entrepreneurs, retired entrepreneurs, executives and or professionals such as doctors and lawyers, who become involved in Angel Investing for reasons that go well beyond pure financial accrual. Reasons for becoming an Angel Investor may often include: to keep abreast of advancements in a particular business sector; developing a broad and varied investment portfolio; mentoring a new generation of entrepreneurs; or simply using their experience, expertise, networks and know-how on a less time intensive basis. Angels typically invest their own money, which needs to be differentiated from venture capitalists.
Venture Capital, which is a type of private equity, and can be described as a form of financing where money from firms and funds are pooled together and managed professionally, by a Venture Capital manager, to invest in small early-stage firms that are emerging and deemed to have very high growth potential, in exchange for equity or an ownership stake. Due to the high costs of the required administrative work involved and the need to be extremely discerning to guarantee a return on the funds, Venture Capital funds are more risk averse and consequently make very few small investments in start-up and seed stage companies or businesses.
“Business Angel Investors are becoming more and more important in funding fledgling and smaller venture businesses, by providing smaller pots of cash to companies that cannot be funded by established venture capital markets.”
Venture Capital as you can see, is a very different animal to Angel Investing which is usually determined by the individual’s personal investment judgement. The vehicle of the Angel Investment may be that of a trust, a business, a limited liability company, an investment fund or other financial entity. There is no pre-determined amount set for an Angel Investor, the range is determined rather, by demand of the investment itself. Angel Investor funding can range from a few thousand pounds to a few million pounds. A Harvard report written by William R. Kerr, Josh Lerner and Antoinette Schoar (2010), indicates that Angel-funded projects are much more likely to succeed, they state that: “Overall, the results suggest that the bundle of inputs that angel investors provide have a large and significant impact on the success and survival of start-up ventures.” Angel Investing is regularly regarded as “patient capital” as Angels are less perturbed about fast returns and exit strategies and are more prepared to assist and back-up the business along its journey to growth and tend to exit over a much longer timescale.
A Few Pros and Cons of Angel Investing
- As an Angel Investor you get to decide on how to use your money, when, where and with whom.
- Investments are relatively small amounts of money, anything from a few thousand pounds to a few million pounds.
- Investment duration tends to be relatively long term, from between 3 to 8 years plus.
- As an Angel Investor you get to meet and engage with the entrepreneurs you choose to invest with.
- Angels are involved directly with the required due diligence and investment process, and are required signatories on all legal investment documentations.
- You get to choose whether to act alone or within a syndicate of Angel Investors.
- You get to be as active or passive as you wish to be within the business and or deal.
- Returns on Angel investments always beat the banks.
- It is not only a financial investment, it’s a time investment too.
- It can be risky, you need to have several exit strategies discussed and put in place in advance.
- You need to do your due diligence on entrepreneurs involved and the business model.
- It can be an emotional rollercoaster due to the nature of Angel Investing, where projects could be passion led, rather than business led.
- Angel Investors should be self-certified as a high net worth or sophisticated investor (as defined by the FCA under the Financial Services and Markets Act 2000 (FSMA)).
What to Look For in a Business as an Angel Investor
Two questions to ask yourself off the top are:
- What are the entrepreneurs like as people and 2) what are their support teams like?
The people involved in a business, whether large or small, are possibly the most important aspect for any Angel Investor to look at. Of particular importance are the level of experience and skill set, drive, motivation and how they occur in the world and to the world. Then, the next step is to look at the actual business itself, its core plan and the sustainability and longevity of the business or project.
Further considerations for an Angel Investor could be to look at whether a business solves or addresses a real problem or challenge within the market place or within society as a whole. Ask yourself: “What is the pain you are solving?”.
“Look at whether or not the business or project is disrupting the norm, or is it creating its very own new niche in the market. Address just how the business is impacting the marketplace. “
Then you need to ascertain if the company or business is protected and whether or not ownership of the business can be confirmed. Further to this, you need to find out who the competition is and what are they doing well and also what they are not doing that negatively impacts their market retention.
Ascertain what the company you intend investing in, is doing that is different to everyone else, in other words what is the USP (unique selling proposition), why should people buy/rent/use them? Or perhaps the company is a first mover, in which case how will they motivate the use of their product or service in order to be profitable, a.k.a how does the business make money? Where are the revenue streams? What are the gross and net growth margins?
It is also important to confirm that the business has the capability to grow, and what the margins for scalability are within the proposed business model. In other words, is the business model a proven model, is there validation for the product or service and are there test results that can confirm demand for the product or service. It would also be prudent to enquire into market size and the potential for market share within their business arena. Different types of businesses may allow for a variety of tax relief opportunities to, therefore enquiry into this is always wise. As an Angel Investor you need to know and nail down the exit strategies before handing over any kind of dosh, and finally, know beforehand whether or not you are willing to include any more Angel Investors into the business.
There are many types of business that Angel Investors can invest their time, expertise and capital into, the one area of interest in this article is Property Angel Investment.
Angel Investing in Property
Finding Angel Investors for property deals, be it commercial or residential, is not the easiest task, however, thanks to modern technological advancements like internet portals such as Venture Giants it has become much easier to pitch deals to the right kind of person. The great thing about finding a network of real estate Angel Investors, is that they tend to be as interested in finding you and your deal, as you are in finding them. Every Angel Investing relationship has to be cultivated from the very beginning with a win/win ethos.
“The rules of the game of investing are the same in all sectors, be it property or anything else. As an Angel Investor you need to know the business plan and the strategy of implementation. Qualities you may want to look for in the property partners is honesty, loyalty, flexibility and perseverance. You need to know where your money is going and what it will be used for within the deal. “
You also need to understand the exit strategies, how much you can expect as a return of funds on the re-mortgage, and how much money will be left in the deal.
You may also want to negotiate a good interest rate on your Angel Investment (usually between 6-10%), that suits you and also works within the deal. There is no space for greed in property investment from either party.
The Angel Investor – Property Partner relationship is the key to a fruitful business. Both parties need to be able and willing to create a space for clear and honest communication, warm and forthcoming, dealing with life and the deal as it really is, keeping it real!.
As an Angel Investor you are not always just there to contribute finance to the venture, you are also there to guide and support your partners, sharing your experience, expertise and know-how.
Kerr, William R., Josh Lerner, and Antoinette Schoar. “The Consequences of Entrepreneurial Finance: Evidence from Angel Financings.” Review of Financial Studies 27, no. 1 (January 2014): 20–55.