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This article is part of our collection on Strategy and Planning
Kayar Raghavan, who has more than 40 years of international experience in banking, financial services, management consulting and business advice, discusses the ins and outs of accessing and securing angel investment for your business.
Last updated: 12 Aug 2020 6 min read
“Angel investing is where high net worth individuals who are willing to take a risk put their own funds into start-ups when they have a minimum viable product. Angels usually come after what they call the ‘friends and family’ round, which is where friends and family give the founder some money to start making a product or service that will be taken to the market.
“A viable business is someone coming to me and telling me they have a product or service to offer and that they have pilot tested it in the market. It’s something somebody can touch and feel rather than an idea or concept.”
“The friends and family or seed investors bring a business from the idea stage to launch. Then come the angels. Around 90% of the venture capitalists (VC) arrive after that, when there has been a certain amount of de-risking with the start-up.
“The start-up, with angel funding, will have gone to the market and proven that the product actually works or the service is viable. Most of the VCs therefore fund growth.”
“Each angel typically comes with £5,000 minimum and up to around £250,000. Angel groups may bring up to £1m or £2m – generally, you’ll have about half a dozen angels in a round.”
“Angels do not typically fund lifestyle start-ups – someone who wants to start a restaurant, coffee shop or high street clothing shop, for example. For the angel taking a risk with their money, these don’t tend to have the prospect of growth or the type of returns you would normally expect.
“Angels expect five or six times the money they put in, over a period of five to eight years. The statistics show that seven out of 10 start-ups fail, so you’ve got to make your money in the other two or three. You fund businesses that are backed by technology, that have a product or service that can be taken to a wider market, which have a great prospect of growth, and are able to build more revenue than, say, a high street restaurant.”
“You would normally expect the start-up to start small, rather than expand internationally straight away. You want people to love your product or service first. It’s best initially for the founder to take it to a smaller market, a market that is easily accessible to you as a start-up, where you’re not spending a heck of a lot of money on marketing. Prove that it’s viable, that people love it, then it will automatically grow in proportion. That’s when the VC comes in to accommodate the expenses for growth.”
“Even Covid-19 presents an opportunity – in the education field, in games, in e-commerce, delivery services, some telecoms services – these are all running high at the moment” Kayar Raghaven
“There is no hard-and-fast rule. The Seed Enterprise Investment Scheme (SEIS), created by the UK government to encourage investment into start-ups and early-stage businesses, is designed to help your company raise money when it’s starting to trade. It does this by offering tax relief to individual investors who buy new shares in your company. You can receive a maximum of £150,000 through SEIS investments.
“Then there is the Enterprise Investment Scheme (EIS), under which you can raise up to £5m each year, and a maximum of £12m in your company’s lifetime. Angels cannot take more than 30% equity in your business under the SEIS/EIS schemes. You’re looking for a product or service that people can identify with. Most angels are looking for SEIS/EIS investments in the UK because of the income tax and capital gains reliefs.”
“There are any number of places that you can go to seek angel investment. There are crowdfunding sites such as Seedrs, Crowdcube, Crowdfunder, SyndicateRoom and lots of others. There are business angel groups in London, Cambridge, Oxford and beyond. You can approach a number of individuals through social media also -–Twitter and LinkedIn are particularly useful. I
“Importantly, I would expect the founder to do some due diligence before approaching the angel. The angel should be appropriate for the amount they’re seeking and the sector they’re in.”
“Number one is the team. What sort of team are they building? They may not have produced a product or service yet but angels will look for what sort of qualification they have, and if they come with appropriate credentials. Equally important is how the founder responds to questions. Do they have the emotional intelligence? Do they get angry or duck questions? Are they honest with their answers? To some extent you would look for experience. It’s quite likely in a start-up that you would not have much experience, but you look at the background of the person. How have they acquitted themselves?
“Then comes the product or service. One of the reasons VCs don’t come in at this funding stage is you don’t know much about the product/service. That’s why the valuations are slightly lower when you put in as angels. A lot of the time you go by a hunch rather than any specific empirical evidence on the ground. You also go with references. Somebody says: ‘Here’s someone who is studious, they are hard-working, they know their subject and are making a sincere effort, the valuation is good, they have a good network, they know the market, they have studied it.’ All of these things are verifiable.”
“I tell the founders, if they have the luxury to choose, to do a search and see if the angel is appropriate for them. Can they contribute their experience, can they make introductions, can they help with documentation, with structuring the deal, in marketing? Unfortunately, founders may not have the luxury of either time or being able to make a choice at the early stages.”
“There are lots of opportunities. Even Covid-19 presents an opportunity in the education field, in games, in e-commerce, delivery services, some telecoms services – these are all running high at the moment. One of my own companies, Fancy Dress Worldwide, pivoted from fancy dress to children’s toys during the crisis. Sales are the same as they were before Covid-19.
“Your capacity and capability to pivot, your understanding of the market, being able to gauge it properly, being nimble – all of this counts when you’re assessing a founder.”
Strategy and Planning