A Beginner’s Guide: Tips for New Business Angels
Risk Warning
This general communication is being communicated confidentially and on a restricted basis to select persons for information and/or discussion purposes only. It is not a financial promotion.
The content of this document has not been approved by an authorised person within the meaning of the Financial Services and Markets Act 2000. Reliance on this communication for the purpose of engaging in any investment activity may expose an individual to a significant risk of losing all of the property or other assets invested.
Introduction
Congratulations on embarking on your journey as a business angel! Angel investing is an exciting opportunity to support early-stage startups and potentially reap significant financial rewards.
However, it’s important to approach this with caution and knowledge. In this guide, we’ll provide you with some essential tips to help you navigate the world of angel investing.
1. Educate Yourself
Before you start investing, it’s crucial to educate yourself about the startup ecosystem, different industries, and the fundamentals of angel investing. If possible, watch as many pitches as possible and read books and articles on the subject. Familiarize yourself with the key terms, such as valuation, due diligence, and exit strategies.
One book we like (and wish we’d read when we started) is by Jason Calacanis – Angel. It’s a bit Americanised but has some great content if you can ignore the US centric orientation.
2. Define Your Investment Strategy
Determine your investment focus, whether it’s a specific industry, geographic location, or type of startup (e.g., tech, healthcare, consumer goods). Having a clear strategy will help you filter opportunities and make informed decisions.
High / Deep Tech tends to have higher potential multiples on exit, but may take longer on average to mature. Some lower tech companies will have lower potential multiples, but may find an earlier exit. Some people like to spread their risk across potential multiple and potential exit durations, others will stick to one side or the other.
Think of angel investing as a project for several years. Budget how much you think you should invest each year and don’t be frightened to say no!
Remember that SEIS/EIS tax benefits are linked to personal income and possibly not from growth of financial assets (e.g. profit from share dealing – please check with your accountatnt).
Ideally, you should make sure your income (via work or investments) allows you to benefit from the SEIS/EIS allowances. Make sure you have a good understanding of this via personal research and discussions with accountants and financial advisors as some investment funds may have income (that can be set against the SEIS/EIS investments). Again, research this with specialists in order to maximise your personal circumstances.
Government Website References:
● IFM03120 – Investors in authorised investment funds (AIFs): accumulation units
● IFM03110 – Investors in authorised investment funds (AIFs): general
3. Diversify Your Portfolio
Diversification is a key principle of investing. By spreading your investments across different startups, you can mitigate risk. Avoid putting all your funds into a single venture, as startups are inherently risky endeavors.
Many companies, especially earlier stage SEIS qualified ventures will plan to raise further funds in 12/24 months time, so if you want to follow on later, plan to allow for this.
Angels will often start with a £5-10k investment and then follow on with a larger amount once they have deeper confidence in the leadership team and market opportunity.
Don’t forget, even if you don’t want to make a follow-on investment down stream, you may want to add further funds in order to maintain your investor shareholder dilution rights. This means that future rounds will probably dilute your investment share percentage, but built into the legals should be the opportunity to add further funds to maintain your original share ownership. So if you purchase 1% of the shares in the first round, and the second round reduces the share percent to 0.7%, you should be given the option to invest enough to maintain the original 1%.
4. Conduct Thorough Due Diligence
Due diligence is the process of evaluating a startup’s potential for success. It involves examining the business model, market opportunity, competitive landscape, team, and financials. Don’t rush this process; take the time to gather all necessary information before making a decision.
It’s always good to take a look at the founders and advisors history on LinkedIn and Companies House. As an angel group, we do look at this but it always helps to have more eyes looking at the credibility of the team and business.
As an angel group, we have a huge wealth of knowledge and experience within the members. We’d always encourage members to step forward and take a deeper look at opportunities within their field.
5. Build a Network
Networking is essential in the world of angel investing. Connect with other experienced investors, entrepreneurs, and industry experts. They can offer valuable insights, mentorship, and potential deal flow.
An angel group is as much a social group as anything else. Often it’s full of people that understand what it’s like to be in your situation. You can find people who you can speak to about things you may not want to speak to your family and friends about.
We fully encourage you to be as social as you want to be, grab a coffee or drink with other members, attend meetings and pitch events etc.
As an angel group, we’re very active in the local Ecosystem and like to maintain close relationships with the British Business Bank, Innovate Edge, SetSquared, MyWorld, Science Creates, Tech South West, National Composite Centre, Universities, and more. Our intention is to organise pitch events at various locations in order for members to learn about these organisations and get more involved if they want to.
6. Be Patient
Angel investing is a long-term commitment. Startups often take several years to mature, and exits can take even longer. We’d suggest a 7-12 year expectation for most high tech companies, maybe shorter (5-8yrs) for the non-tech companies that may have lower multiple expectations.
Be prepared for the certainty that not all of your investments will succeed. Out of 10 investments made, 3-4 may not last the journey, 3-4 may just do ok and plateau, not giving an option to exit (this is the worst scenario) and 3-4 may do well enough to provide a great exit multiple that covers all the rest! This is why it suits many angels to spread their risk across quite a few companies. Companies that fail tend to do so earlier than companies that succeed, so brace yourself for a period in which you’ve had some failures but are yet to see any successful exits.
7. Actively Support Your Portfolio Companies
Your role as a business angel doesn’t necessarily end with the investment. It’s good to actively support your portfolio companies by providing advice, making introductions to potential partners or customers, and being available to offer guidance when needed.
Remember, being a business founder can be a very lonely place. Often they can’t talk to their family, business partner or staff about issues and challenges on their minds. Angels make very good listeners over a coffee, it’s great to allow founders to ‘download’ and de-stress.
Founders are often ‘geared’ to be optimistic and bullish when talking about their business. As business angels we know how tough it normally is and how many daily challenges there usually are. We’d encourage angels to allow founders to discuss their challenges rather than all the positive news (although that’s also good to know as well!).
8. Stay Informed About Regulatory and Legal Aspects
Stay up-to-date with the legal and regulatory requirements for angel investing in your jurisdiction. Understand the terms of investment agreements and seek legal advice if needed.
AIB works closely with Founder Catalyst when setting up legals for companies looking for funding. They are very good for creating well balanced legal documents which balance the needs and rights of both founder and investor. It also helps that founder, Sam Simson, is an AIB friend and member.
Where companies have had previous investments, we use the services of professional lawyers experienced in fundraising to support the process fairly.
9. Manage Risk
While angel investing can be highly rewarding, it’s important to be aware of the risks involved. Be prepared for the possibility of losing your entire investment in some cases.
10. Celebrate Successes and Learn from Failures
Celebrate the successes of your portfolio companies and learn from any failures. Reflect on what worked well and what could be improved in your investment strategy and due diligence process.
AIB wants members to be involved in company selection where possible and practical, especially if the member has industry expertise.
A large factor of failure can often be seen, on reflection, in the founding team. We place huge weight on the credibility and experience of the founders and their advisors. Anyone can start a company, few can scale a company.
We often see companies starting in one direction and then having to pivot downstream because the existing model isn’t working or because the they have to change with market demands etc. This can be alarming and worrying to investors so it’s important to be informed about what’s going on.
We would expect companies to report to us every quarter, sometimes every month if earlier stage. We’re also keen to have an observer on the board to attend monthly board meetings and help give direction and confidence to the founders. All investors should receive regular board reports.
Conclusion
Angel investing is a dynamic and potentially lucrative venture, but it requires careful planning, education, and diligence. By following these tips, you’ll be better equipped to navigate the world of startup investing and increase your chances of making successful investments. Remember, every investment is a learning opportunity, and with experience, you’ll become a more effective and savvy business angel. Good luck!
IMPORTANT NOTICE
Angel Investors Bristol Limited (“AIB”) is unregulated by the UK Financial Conduct Authority. Consequently, membership is restricted only to those Applicants who are able to truthfully self-certify as exempted recipients who are eligible to receive any financial promotions which are communicated to Members by AIB in compliance with the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (SI 2005/1529) (the “Financial Promotion Order”).
All investments in early-stage companies are inherently risky: risks include illiquidity, lack of dividends, future dilution and potential loss of capital. AIB does not provide Members with any financial, legal or tax advice in respect of in respect of their participation in investment opportunities made accessible to them via AIBand Members are expected to use their own insight and experience to come to their own investment decisions and seek independent professional advice to the extent that they deem necessary to do so.
Any investment opportunities made accessible to Members via AIB will be on a syndicated ‘deal-by-deal’ basis and there will be no pooling of Members’ assets by AIB and no discretion or management exercised by AIB in respect of any investments made by Members (save for in respect of AIB’s own individual share of any investment(s) made).
Any financial promotion which is communicated by AIB will be accompanied by a prescribed risk warning which is compliant with the Financial Promotion Order.
AIB wishes to draw attention to the following key risks to be aware of when investing in early-stage companies:
You could lose all the money you invest
If the business you invest in fails, you are likely to lose 100% of the money you invested. Most start-up businesses fail.
You are unlikely to be protected if something goes wrong
Protection from the Financial Services Compensation Scheme and/or the Financial Ombudsman Service is unlikely to be applicable to most investment opportunities and in any event does not cover poor investment performance.
You won’t get your money back quickly
Even if the business you invest in is successful, it may take several years to get your money back. You are unlikely to be able to sell your investment early.
Don’t put all your eggs in one basket
Putting all your money into a single business or type of investment for example, is risky. Spreading your money across different investments makes you less dependent on any one to do well.
The value of your investment can be reduced
The percentage of the business that you own will decrease if the business issues more shares. This could mean that the value of your investment reduces, depending on how much the business grows. Most start-up businesses issue multiple rounds of shares.
The content on this website is provided for general information purposes only. It does not constitute professional, legal, financial, [medical] or other advice. No responsibility is accepted for any loss arising from reliance on information contained on this site. Users should seek independent professional advice appropriate to their specific situation
