Angel investors can be defined in several different ways. Typically, they are ex-entrepreneurs, business leaders or successful people in their own right. But whatever their background, they all have one thing in common, a high net worth. Further, in the UK, to become an accredited Angel investor, there are specific requirements that you must meet (discussed in the due diligence section later).
In this guide, we are going to cover all the facets of Angel investing:
- Who are Angel Investors?
- Why Choose Angels Investors?
- What are The Different Types of Angel Investors?
- How and Where to Find Angel Investors?
- Getting an Introduction to Angels
- Cold Message Template
- Approaching and Pitching to Angel Investors
- Angel Investor Schemes (SEIS /EIS) (UK only)
- Following up
- Due Diligence on Angel Investors
Who are Angel Investors?
Angel investors are high net worth individuals that typically make investments in early-stage businesses. They operate either alone, as individuals, or as groups (syndicates). The amount invested at any stage thus varies considerably based on the type of Angel that you are looking to work with, as groups of Angels tend to invest more money than individuals.
One study has shown that on the European side of the Atlantic, there is a distinct shortage of Angels. They estimated that there are around 330,000 Angels (in 2017) in active operation within the European Union (EU). This is out of a total population of over 500m. Whereas in the United States (US), there are an estimated 300,000 Angels who invested last year, with a population of only 327m.
Within the UK Angels, diversity is poor – with only 14% of the Angels being female, and just 14.7% are less than 35 years old, with the average age being over 50. This makes finding particular investors that might suit your business more difficult.
Why Choose Angel Investors?
Whilst it may seem that there are far fewer Angels in the UK and Europe than somewhere like the US for example, Angel investors are significantly more prominent in number than other types of investment firms. The British Private Equity and Venture Capital Association (a membership group for Venture Capitalists (VCs) and Private Equity (PE) firms) for example, has less than 800 members. Whilst we cannot pin down exact numbers of firms, due in part to the unpredictable nature of capital investment companies, it is not hyperbolic to say that there are far more Angels than VCs and PE firms combined.
Further, on the investment side, Angels are typically more likely to invest in early-stage startups. Unlike VCs firms, they don’t need to make 40x returns on their investments to be successful. This isn’t to say that the higher potential returns aren’t more attractive, but more moderate returns attract them just as easily. Some angels operate in a disciplined manner like a VC (investing in a particular sector or stage for example), and some will back businesses that they have an affinity towards or feel they can add value to the business, independent from the financial gain.
With VCs, they need to see a path to massive scale because that is where the largest returns are. A VC might push you to have a target market of hundreds of millions, but an Angel can make a return if you aim for hundreds of thousands. Naturally, not all VCs are like this, and neither are all Angels, but there is an established trend. Further, it is worth noting that a startup can raise from both VCs and Angels, either in the same round with an early-stage VC or in separate rounds when the VCs write bigger cheques. Angels who have a lot of deals under their belt will probably have worked with particular VC or PE firms and might be able to provide a warm introduction. Often, many work in the investment industry and make Angel investments into businesses they can’t necessarily invest into through their VC Fund (for various reasons).
When it comes to the actual investment deal, Angels are generally more lenient on the terms. They are investing their own money and thus are able to negotiate more freely. Further, as Angels are more numerous, and therefore, their backgrounds are more diverse, it might be particularly hard to find the institutional investment that specialises in the niche area that your startup operates. (I know we just made a point a point about the lack of diversity of Angels, but relatively speaking they are far more diverse than VCs and PE firms).
As mentioned, you are not limited to a single source of investment, and as set out in our post ‘why your funding round can never be too crowded’, Seedrs often work with VCs, Angels and other sources of capital for meaningful capital injections into growing startups. More details about the ways Angels and VCs compliment crowdfunding campaigns can be found in our guide, Angel Investors vs Venture Capitalists vs Crowdfunding.
What are The Different Types of Angel Investors?
There are two main types of Angel investors, those part of a group and those who are individuals. Then within those two main groups, there are those that are active and those that are passive.
Typically, individual Angels are ex-founders or successful business people. These investors are able to write cheques between £10k – £250k. They tend to move very quickly with investment once they have made a decision, which can be advantageous when trying to close an investment round.
They usually have a wealth of experience in the specific area where they made their money, and thus can be enormously beneficial when working with companies that complement that knowledge base.
Individuals have no guarantee of being a gateway to other sources of funding, whilst they might be able to introduce you to people they know, there is no guarantee that they can bring on more money – compared to those part of a group where the chances are far greater. It is also worth noting; they may not be interested in taking an active role in the round, i.e. they may not lead it. Having a lead investor is particularly advantageous when seeking multiple investors.
Groups of Angels, sometimes known as Angel Networks or Angel Syndicates are typically groups of Angels that have less investing potential on their own than the typical individual investor, but as a group can bring more substantial infusions of cash. They share the workload of conducting due diligence, portfolio management, and sourcing (or the cost of having others conduct it on their behalf). Typically, they invest £100k – £500k, but larger, more committed groups can reach up to £1M.
The process is more formalised than individuals with it drawing more similarities to an early-stage VC. There may be pitches, multiple meetings and thorough due diligence. Further, these may have to be repeated for multiple sub-groups of Angels depending on the structure of the network. However, they are more likely than individual Angel investors to lead your round of funding, and as part of a group, they have access to deeper levels of funding either internally or through relationships with other institutions.
Active vs Passive
Active Angels are those more than likely join your companies board and take anything from a day to day interest in progress, to a more quarterly perspective. This can be either beneficial or a nuisance – thus making it vitally important to conduct your own due diligence on the Angels you let invest in your round.
A Negative Active Angel, for example, might be an Angel investing in their first few companies, and as it is their own money, they may have a tendency to want to micromanage the funds, checking on how it is being spent.
A Positive Active Angel, on the other hand, is someone with lots of domain-relevant experience that can provide introductions and advice whilst building your company. They take on a role as an advisor, answering questions and point you in the general right direction when you need realignment.
A Passive Angel is one that does not involve themselves with the business; they may simply want to receive quarterly or yearly update emails and are very much hands-off. This can be good or bad, depending on what your startup requires. Some entrepreneurs like a clear divide between those that have put money in the business and those that are advising, others like to get both in the same package.
Whilst passive Angels are typically neither good nor bad as it depends on how you want to engage with them, there are extreme examples of passivity that might cause problems, and it is worth taking steps to mitigate. If they are too hands-off and you want to raise a new round (something that typically requires investor signoff on issuing new shares and whether they want to take up their rights to follow on), and you can’t reach them, then there are going to be problems. It is best to try and get as a direct line to them as possible, as an email address sometimes won’t be enough.
Angels of Light vs Angels of Darkness
Active or passive, there are those that invest with a view to add value versus those that try to extract value. Whilst negotiating Shareholder Agreements or reviewing term sheets, there are terms and conditions can be both investor- and entrepreneur-friendly, but then there are those which are heavily investor-friendly and business unfriendly. This ultimately extracts value from a business rather than adding value.
How and Where to Find Angel Investors?
The Seedrs Anchor Investor Service is designed to connect startups in need of a larger cornerstone investor with relevant institutional investors from our network. The service secured over £17M in investment offers for 15 businesses in 2018.
If you’re fundraising through Equity Crowdfunding, an anchor investor’s presence can bring you closer to your funding target and can increase the confidence of other potential investors.
In addition the anchor investor service, Seedrs are launching the ‘Seedrs Dealroom’, which is designed to provide professional investors (angel and institutional investors) with advanced access to Seedrs pipeline and portfolio, to help businesses secure a lead investor.
Possibly the best and most obvious place to find Angels is your personal network. Whether this is through friends or family members – enquire if they know anyone that has invested in startups before. You can also look to other founders that you know, ask them how they found the Angels they did, and if they might be able to make introductions where appropriate.
If you don’t have founder networks already established then try reaching out to CEOs of companies in a similar vertical and stage of life as your own, or slightly ahead if you are trying to raise funding and they have already. You can do this through LinkedIn and Angel.co. The goal is not to ask them for money – rather how they found their Angels and whether they would be open to making introductions.
It is important to be relevant with whom you reach out to, and Angels focused on FinTech, for example, will most likely be less interested in an investment opportunity in PetTech.
Joining an accelerator can be a great place to grow a network of Angels. As one of an accelerator’s primary goals is to help their companies prepare and raise investment, they will have spent significant time developing relationships with Angel investors. Further, there will be Angels that they have worked with before on previous investment rounds and will be able to introduce you to Angels that fit you and your company. These are going to be some of the warmest introductions you can receive (something we talk about later) and thus have a higher chance of success.
Finding Angels online perhaps offer the most breadth and options – however, the connections will be the least developed and the subsequent introductions some of the coldest.
Press Articles: You can look through other companies in a related space to you and see who they announce partook in their funding rounds. This is a great way to find investors who are already in a similar area to your company, and therefore more likely to listen to your pitch.
Directories: There are multiple directories of Angels that you can use to find people that match your search criteria. We’ve listed a few here (UK and EU relevant):
- UK Business Angels Association
- European Trade Association for Business Angels
- Business Angels Europe
Company Information: There is free online information about companies published online. The UK has companies house, and the EU has the E-Justice Portal. Using these services, you can find out information about shareholders and use that to narrow down a list of Angels to target. From there, take that list and work through LinkedIn to determine if they are individuals or part of a group, and determine the most appropriate way to reach out.
LinkedIn: As a great starting point, you can find similar companies or startups in your local area, and look to see who has listed themselves as an advisor or board member of that startup – there is a high correlation between these two roles and early-stage investor.
Angel Groups: We’ve also assembled a small list of Angel networks that you can reach out to. When reaching out, try to find as close connection as possible – if that means reaching out the person directly through social media, LinkedIn or email rather than filling out their form do so.*
- Wild Blue Cohort – Invests in early-stage business, with a special interest in London based businesses.
- 24 Haymarket – An Angel group who specialises in equity investments and specific nurturing of the companies they are involved with.
- Venture Founders – Calling themselves ‘the family office of venture capital’, they invest in UK based startups.
- Angel Academe – Focuses on female-founded tech companies, and over 80% female Angels form part of its network.
- Cambridge Angels – A Cambridge based group of entrepreneurs and experts that help mentor companies as well as provide investment. Typical investment is between £50k-£500k.
- Rising Tide – International group of female Angels primarily investing in women with businesses in areas such as workplace equality and governance, supply chains, and products and services that scale.
- Newable – Formally ‘London Business Angels’, the focus on Med Tech, AI, Space and Robotics.
- Astia Angels – Global community of over 5000 investing in businesses with women in positions of equity and influence.
- Mustard Seed – Invests in early-stage businesses that generate both strong financial and societal returns. It draws on a strong network that includes business leaders, an FCA-authorised VC fund and top universities. Investments range up to £1M.
* This is not to say don’t fill out the form, it is just better to build a relationship (if possible) beforehand. If you reach out to raise, you’ll be told to fill out the form, so ask for advice over coffee meetings.
Professional Service Connections
A final place you could enquire would be lawyers or accountants that your company uses. Bear in mind that not all firms will be open to this, but if yours is, then you can ask if they wouldn’t mind delicately mentioning your company to clients they think would be a good fit. Furthermore, they might have Angels that do this in reverse and ask them to keep an eye out for promising companies that come onto their radar.
Getting an Introduction to Angels
When it comes to introductions, there are a few tips that can go a long way to reducing the number of negative responses.
The first thing to do is research. You need to have an understanding of the person you are trying to contact.
What is their investment area?
If, for example, you reach out to an Angel and they’ve only ever invested in automobile startups, and you’re pitching a food-tech startup then they’re probably not going to be interested as it is not their area of expertise. Further, they’ll probably be annoyed that you didn’t do your research and spammed them.
What are their investment criteria?
Do they invest in the way you are looking for? Are they solely an SEIS investor, or only do debt-based financing? It is good to try and get a feel for the previous deals they have done, and how they work.
Are they an active investor or passive?
If you can determine this information, then you can tailor your pitch to fit the style they like to employ – talk more about how you value their input and experience (if you actually would) if they are active, or focus more on the numbers and returns if they’re passive.
What have they done that makes them stand out to you?
Look at their professional history, what projects or companies have they worked with or for, and what did they do – what stands out to you as something that you genuinely find interesting or valuable? How have they excelled in ways that you admire? What parts of their experience do you most resonate with? Beyond money, what makes them a great person to invest in your business? (A lot of Angels will ask this; no one likes being thought of as purely a bank).
Warm vs Cold
Naturally, a warm introduction is best. Being introduced by a trusted colleague or friend is the quickest way to get past the initial time-wasting or trust barrier and gain access to Angels. So whenever possible, try to find people who are connected to the person you are trying to reach, whether that is connections you’ve made on LinkedIn, those you’ve met at events, or other companies that have raised through those individuals.
Bear in mind that if someone says that they are not interested or don’t think you’re the right fit for them, ask them if they know anyone that that might be, or who might be a better fit for your company. Angels know Angels or other people in the funding community, so introductions from them directly are very valuable.
But what if you don’t have those opportunities? Or they are few and far between? Then you need to maximise your chances of getting a response.
How to Ask
If an Angel is particularly active on a platform, try reaching out there (Twitter, LinkedIn, AngelsList, etc.). If they’re not, opt for their email address. Here is a quick list of things to do when reaching out:
- Don’t ask for money
- Ask for advice
- Keep it brief
- Attach the deck
- Ask for a call if they think they can help
Cold Message Template
Use the form below to download a simple template that you can adapt depending on your own research regarding the Angel you’re trying to contact (Important note: this is not going to work for Angel networks), along with our free pitch deck template.
This template for guidance on structure, but the greater personalisation and more engaging your email is, the more likely it will be read and potentially actioned.
Approaching and Pitching to Angel Investors
Typically, these will have online presences that you can reach out through their prescribed path. They will have an online form or contact address where they will ask you to submit materials pertaining to your company. If their website mentions particular sectors, technologies, niches or verticals they invest in, then it is a good idea to make sure your pitch matches up with those things in some way. You don’t have to align perfectly, but you must at least be in their investment area.
If they only invest in AI or ML fintechs, and you’re a food-tech startup, explain how you are using those things (if you are) to improve your customer experience or service. Whilst it might be enough to get you a cheque, it may open the door and other opportunities.
Properly crafting a pitch is a little beyond the scope of this article – however, we’re going to run over some of the more general details.
Types of Pitch
An email pitch is typically a paragraph at most, and it has a lot in common with your elevator pitch – the main goal is to be direct to the point and get the person interested in hearing more. Or in this case, open your deck and read more about your company. There are services and products that you can use that will tell you if people have opened your email and whether they have clicked your attachment – this way you can work on your email pitches with data-driven feedback.
Pitching over coffee can be particularly effective because it allows you to respond immediately to concerns and queries. You can adapt your pitch on the fly and alleviate concerns. It is vitally important that you know your key figures inside and out, as they will be the most common questions.
Further, this is the time to build a relationship, something beyond money. Probe them about their experiences, ask for their advice and opinion. Get them talking about themselves. In the end, if they say no. or don’t think it is for them, then ask if they know anyone who’s area it is or who might be able to point you in the right direction.
If you’re pitching at an event, you’re probably pitching to a room of Angels or representatives of the Angel group. You’ll most likely have an allotted time schedule and will have to edit your standard presentation to fit their criteria. It is important to find out the rules of the pitch and if you are required to disclose certain figures. For example, month on month revenue growth, or how much you are raising, and at what valuation.
Pitching is also about learning. You will receive plenty of no’s, but it’s what you can do with those no’s that is important. If the same feedback is coming through, then it’s about how you can address these in your next meetings, or tweak your materials. Also, if they’ve said “no, not right now” it’s about building a relationship potentially for when the timing is right.
Angel Investor Schemes (SEIS /EIS) (UK only)
If you come across Angels that aren’t yet Angels or haven’t got much experience in Angel investing, then you may be able to encourage them with the SEIS or EIS schemes respectively. Otherwise, nearly all experienced Angels will have heard of these schemes. (If they haven’t, this should be a large red flag as to whether you want them to invest in your company).
If you’re not in the UK or raising as a UK company, then look at where you are based to see if they have similar schemes for early-stage companies.
This is a government-backed scheme that offers tax relief to investors that invest in your company at an early stage. Whilst there are many rules that your company must follow in order to be SEIS eligible and importantly maintain that eligibility it is widely regarded as worth it, as many investors are more liberal with their investments if they can do it through SEIS.
A SEIS investor gets to claim up to 50% of the money they invest back on their tax bill. Your company can raise up £150,000 on this scheme. For example, if they invested £10,000 in your company, then they would be able to claim £5,000 back on tax, and thus they have effectively only ‘spent’ £5,000 but got the equity value of £10,000. Furthermore, SEIS investments don’t have capital gains tax on the returns, so if they make a £100,000 return, they won’t pay tax on that.
It is important to highlight that whilst this is great for the investor, your startup has a series of rules to follow as well. You can find out more about SEIS here.
The big brother of the SEIS scheme, the tax relief here dips but the amount able to be raised increases over-100-fold. With EIS you can raise up to £5m a year, and a total of £12m over your companies’ lifetime. With EIS, you get a 30% tax break as an investor on the amount invested and again, pay no capital gains on the returns earned.
Similar requirements for the company as SEIS also apply, find out more here.
Once you’ve pitched in some fashion, eventually you’re going to need to follow up – most Angels are going to be looking at multiple deals at one time, and Angel networks will potentially have 100s of deals to consider when looking at yours. Therefore, you’ll need to chase them occasionally (in reality, quite a lot).
It is important to remember that you need to be politely persistent. Don’t become a nuisance or a pest, but do gently remind them.
One of the most effective ways to do this (and least invasive) is to have a company newsletter that you publish on a fortnightly or monthly basis. Here you can include recent news about your companies’ achievements, the raise you’re undertaking and keep people engaged with your company.
After every meeting with an Angel or potential investor, or any interesting people you meet, you should ask if you can put them on your update list. This way, you’ll grow the list, and you never know who may end up helping you out with problems or introducing you to relevant people down the line. Further, Angels you have been meeting with will constantly have your company bought back into mind when the emails land in their inbox. Make sure your newsletters stand out – think emojis and bright colours with catchy headlines. The newsletter can’t do its job if people don’t read it.
Due Diligence on Angel Investors
Whilst you are looking for Angel investors remember that it is your right (and responsibility) to conduct due diligence on them as well. This again could be an article itself, so here are just a few questions you should be asking if the conversations start to get more serious.
Are they regulated?
There is a regulatory framework in place to protect Angels and entrepreneurs that the Angels in the UK (and most other countries) must fulfil before accepting pitches and business plans. They can self-certify this if required. Further, if they are part of a group, what is the legal standing of that group and does it have the necessary permissions to invest in companies in your country?
What kind of Angel are they?
Are they a certified high net worth individual? They’ll have to have a net income of over £100,000 or net assets above £250,000 (not including their house). Additionally, if they are a certified sophisticated investor, they have to be one of the following:
- Director of a company with £1m revenue within the last two years.
- More than one investment in an unlisted company in the last two years.
- A member of syndicate or group of Angels for a minimum of 6 months.
- Worked professionally in private equity or finance for small/medium enterprises.
What fees will they charge for the investment?
This is particularly important with Angel networks as they will often have overhead and legal costs that they need to pay, which are passed on to you as fees. If individual investors have these fees, enquire to what and how much they are, and use common sense to determine if they are reasonable. An individual shouldn’t want to be cutting into his or her own investment with fees to any reasonable degree.
Are there any other companies you have invested in I can talk to?
This is worth the time and effort to do – if the Angel has a bad reputation post-investment, either for not following through or being a pain in a different way, you can often get other founders to talk about it as they don’t want you to make the same mistake. Be careful with your prodding though and listen carefully; they may not want to criticise actively. It is best to look for lacklustre replies about investors and enquire further as to why they feel a particular way about the person in particular.
What terms do you usually use? (Can I see your standard term sheet?)
This will give you an advanced heads up about how they will behave in negotiations later down the line and an idea of the terms they will want. Knowing what terms people want will make it easier when bringing together groups of Angels to invest.
Angel syndicates will normally have set terms that can’t be changed as they are agreed upon by all the Angels. Therefore, it is worth knowing what you’re getting into before it gets too far.
If you’ve ever wondered what a funding deal on Seedrs would involve, take a look at our Seedrs’ Plain English Term Sheet.