Angel investors are usually the first to invest in a business, during the seed round. They invest about three times the amount venture capitalists do, and are crucial to getting thousands of UK startups off the ground every year. Angels invest on average £42,000 per company, usually in return for a stake in the business.
But who are they? Why do they choose to invest in startups? And how do you go about becoming an angel investor? Read on to find out all you need to know about angel investors.
Who are angel investors? Why do people choose to become investors?
There is no 'one size fits all' type of person who becomes an angel investor in tech startups. Although it isn't mandatory, most tend to have worked in the industry for at least a decade, and many of them have set up their own companies.
But why do they choose to become investors? Obviously there are potentially large financial rewards on offer (with a big dose of risk). However, it's also fun, keeps you at the forefront of the latest advances within tech and can be rewarding emotionally too, according to the 12 angel investors Techworld spoke to.
“It's a way to give something back by helping founders of startups,” says Steve Feldman, who has invested in four UK companies.
“For me, investing allows me to meet these people with the ideas and passion to achieve something different. It’s not about finding the next unicorn, it’s about helping those attempting something meaningful to reach the next stage,” says Pip Wilson, founder of divorce app Amicable.
Investing also lets you help a sector or region that is close to your heart. "For me the appeal is being involved with something bigger, companies looking to improve an existing space and investing in local companies based in the North West," says Chris Haslam, founder of Ixis.
How do angel investors evaluate startups?
Every angel investor is different, so inevitably the approach to startups varies from person to person.
However, most agree that the first step is to do plenty of research, and all emphasise the importance of a good business model to their decision.
"I evaluate the business model of the company to understand its viability and potential for growth. I also like to meet the CEO and management team to understand their ethos and approach to the business and to the industry," says Russ Shaw, founder of Tech London Advocates.
"I invest in companies that have a straightforward business model that make sense - you’d be surprised how many business models are not clear - and to whom I can bring more than just money," says Colette Ballou, founder of Ballou PR.
One thing that is clear is knowing the right people is a crucial part of the process, so angel investors and startups would be well advised to get networking.
"Usually someone from my network asks me to have a look at a business, they generally know the sort of thing that interests and excites me. I have a look online at what the startup is doing by Googling various things, then if I like what I see, I'll have a coffee or glass of wine and then I write a cheque," says Gi Fernando, founder of Freeformers.com.
"I prefer to invest in companies with teams I’ve known previously – but I have been known to break this rule," says Ballou.
Angel investors have to be prepared to walk away from an investment if it isn't right for them. In fact, the majority of startups will not be.
Feldman says he rejects seven or eight out of ten of the ideas pitched to him immediately "because the concept doesn’t sit within my areas of interest or doesn’t meet my basic criteria".
"The quality of the founders of a startup and the chemistry with them are key determinants for me," he adds.
How do angel investors invest in a startup?
The usual approach when investing in a startup is to draw up a 'term sheet': a document which sets out the terms by which an investor makes a financial investment into the business. This confirms the amount they will invest, and what they will get in return - usually a certain percentage stake in the company.
However, other routes exist. "Mostly we invest through an SPV (Special Purpose Vehicle) or a syndicate along with a group of other investors. You can invest small check amounts, like $10-$20K this way alongside huge, institutional funds and other incredible investors," says Heather Russell, founder of biscuit.io.
Another alternative is investing through crowdfunding sites like Seedrs and Crowdcube, according to Jack Oughton, cofounder of Tasting Britain.
What makes a good angel investor?
One who "finds the right balance between patience, as it can take a long time for a technology company to flourish, and urgency, because every minute is valuable in a startup," says Dominic Keen, founder of High Growth Robotics.
Investors also need to have the guts to believe in something new and different that challenges received wisdom, says Per Roman, cofounder of GP Bullhound.
Feldman advises mentally writing off the money the moment you invest it, so you aren't either emotionally or financially "over involved" in the success of the startup. He also says you should "be willing to offer your expertise when it is wanted but not get upset when your advice is not followed".
It's important to be flexible, proactive about learning, stay up-to-date on current trends and consumer demands, and keep your mind open to new opportunities, according to Ali Alani, CEO of Imperial FX.
What sorts of mistakes should angel investors avoid?
Just as there are a number of positive attributes angel investors need to thrive, there are also risks, pitfalls and challenges they need to navigate, or avoid.
It is crucial to focus on the founders above virtually all else, according to Roman, who says his biggest mistakes have come when he has backed people who do not possess the necessary skills to succeed.
Ballou says that while it is good to be an optimist, you must tempter it with discipline. "Most people who like working with startups have the same problem: they fall in love with an idea or the team before thoroughly vetting it," she explains.
One mistake is to underestimate the time and money it takes to go from minimum viable product to a full commercial offering. It is always greater than predicted, says Keen. Obsessing over your competition is also an error too many startups make, he adds, as it detracts from delivering your own plans.
Another error is failing to keep up a regular, steady flow of communications between the company and investor. According to Shaw: "The lack of regular communications can often be an indicator that something is not right."