Want to be an angel investor? Change brings opportunity.
Risk capital - a vital source of finance for start-ups
In the past, equity finance or risk capital for young businesses with high growth potential has generally been provided by angel investors or early stage venture capitalists. Risk capital is a vital source of finance for ambitious fledgling businesses. Without it, we would never have seen businesses such as Facebook, Twitter, Instagram etc.
How does it work?
Angel investors provide capital in exchange for shares in a business with high growth potential. Businesses are generally young businesses - start-ups or early stage. These young businesses are unable to raise debt finance from banks for a number of reasons:
- No track record
- Not yet generating revenues
- Generating revenues but not yet profitable
It's not just start-ups that need equity finance
More mature businesses may also require equity finance to facilitate high growth. For example, a business may be launching a new ground-breaking product or acquiring a competitor.
If the investment can't be funded through existing reserves within the business, or from traditional debt from banks etc., then an established business may well consider raising equity finance from business angels or early stage VCs.
Whilst it may be businesses like Facebook, Twitter, Instagram, etc that grab the headlines, there are thousands of businesses that have flourished into successful multi-million pound companies. Without equity investment from angels and early stage VCs, this wouldn't have been possible.
So what's changing?
In the past, angel investing has generally been the preserve of high net worth individuals. Usually it's people who are entrepreneurs themselves. They have built a successful business in the past, have some awesome experience in business and are well connected.
They have since sold their business and now have capital to invest. What we are seeing now, is that the early stage investor base is changing and increasing. It's no longer just about high net worth individuals and early stage VCs that can access these exciting investment opportunities.
The early stage investing market place is now accessible to a wider audience of aspiring angel investors. Why? Technology is a great enabler. The web means the early stage investment market has been digitised.
For example, instead of entrepreneurs pitching face-to-face to business angels at an angel network, they can now pitch online via dedicated equity crowdfunding platforms that connect entrepreneurs with investors. This opens up investment opportunities to the affluent masses - a group of latent angel investors.
So who are these latent angels?
These are people who perhaps run their own successful business - possibly a lifestyle business with a turnover in excess of £1m, making reasonable profits and providing the owners with a decent living. But it's not just people who run their own business, it's also people working in senior management and directorial positions in large SMEs, public sector companies and PLCs.
Well, why not extend the investment strategy and invest in unquoted companies offering high growth potential? These people are knowledgeable investors who have a thorough understanding of business and finance. They understand the challenges and risks associated with start-ups and business in general.
Why do they invest?
For the same reasons seasoned angel investors do:
- they have capital available to invest and are looking for a better return on investment
- to put something back
- to help other entrepreneurs, friends, family etc grow a successful business
- to diversify their investment portfolio
- to make their own investment decisions
- to invest in businesses which resonate with their core values
- to invest in businesses where they can add value through mentoring
So what does this mean? The emergence of online equity investment platforms means tax-efficient investments are more accessible to a wider market.
Want to find out more? Download our Investors ebook - an introduction to equity crowdfunding and online angel investing below.