If you’ve been looking at funding options, then chances are that you may have heard about ‘angel investors.’ But who are they and what can their involvement mean for your startup?

A business angel investor generally invests their own disposable finance into startups or early stage businesses. Angels often bring a great deal of professional experience into the fold, so if your business attracts the interest of an angel, bear in mind that it’s not just about the funding.

The rise of the angel investor

Angel investors were first brought to the public’s attention with the rise of television programmes like Dragons’ Den and The Apprentice. It seems that these shows (and their success) is because a more entrepreneurial culture was emerging. In 2013, Enterprise Investments Schemes – popular amongst angels – received almost £1bn more than seen in the previous year.

If you also look at some of the companies that have been tended to by angels, then it’s easy to see just how influential and successful a business can be with this type of investor. Zoopla and Lovefilm are both examples, with the latter being bought by Amazon for £200m in 2011.

Who are they?

An angel investor, as mentioned, invests his or her own money. This means that they will probably want to play an active role within the business that they are investing. According to Jenny Tooth, chief executive of the UK Business Angels Association, Angels take their own decisions ‘about putting their own personal money into a small business, and may take an active role in helping that business to grow; giving their time and contacts as well as strategic advice.’

There are roughly three main groups that the angel investor community can be divided into:

1)   The entrepreneurs – these are the people who have set up their own business and had a successful exit. They have first hand experience about nurturing a company and this is where their expertise lies. They will also have spare money available. This group makes up the largest proportion of business angels. They know the successful formula and will try and replicate this in a marketplace that they have experience in.

2)   The professionals – this group is made up of members of the professional classes who have spare money to invest. These individuals will usually be lawyers, accountants etc. – people with expertise that will prove useful on a business’ journey. For these people, angel investing may mark the start of a second career or as a distraction during retirement, so there is not as much emphasis placed on making a lot of money amongst this group.

3)   The experienced – For this group of people it’s about a career. Typically, members of this category of angel investor will have a background in private equity or run a family office. They’re likely to be more experienced investors and sometimes will have inherited wealth.

How does it work?

How much can you afford to lose? That’s the question posed to anyone wanting to be an angel investor. Once this has been decided, it’s established whether the angel wants to invest on their own or as part of a group (known as a syndicate).

Most angels invest through syndicates for a number of reasons. By investing with a number of other individuals, the variety and level of expertise available to that business will be greater. Being part of a syndicate also lessens the risk involved with investing. The more people involved, the less the level of risk.

Former Dragons’ Den star, James Caan, has said though that syndicates can sometimes lead to people investing in a market that they don’t know – something he believes to be one of the biggest mistakes that an angel can make. This mistake is usually caused by the huge number of opportunities there are for syndicates. Caan has said that:

What are the benefits for angels?

So the benefits that small businesses can get from having an angel investor are clear, but aside from potential returns, what else can an angel get out of the arrangement? 

One of the big bonuses for angels is the tax breaks that their investments can bring. There are two schemes run by the UK government through which investors can access certain smaller companies. The Enterprise Investment Scheme offers angels 30% income tax relief up to £1m a year. While angels must hold the shares of these businesses for at least 3 years, any profits made from their sale are free from capital gains tax. Another scheme, called The Seed Enterprise Investment Scheme, offers an even greater tax relief of 50%, but is capped at £100,000 a year.

How are crowdfunding investors different?

More than anything else, crowdfunding is something that normally attracts first time investors. But there are more distinct differences that separate angel investors from those who look to crowdfunding. 

One major difference is due diligence. Due diligence is the investigation of affairs completed by an investor before they decide to write that tasty cheque for your business. Because crowdfunding usually only permits people to make a small investment, due diligence isn’t carried out. This is something that angel networks will always look to investigate thoroughly.

When carrying out due diligence, an angel will normally spend around 20 hours looking into a businesses financial background before making the decision to part with their cash. If there are any financial affairs that cause the slightest bit of worry, then your business could lose out on getting an angel.