Business mentor and angel investor Mark Lyttleton has invested in and supported many early stage businesses that aim to have a positive planetary impact, including Maanch, C-Cell, OHM Energie, Clim8 and Skoot. This article will explore what it means to be an angel investor, identifying the different types of support they offer to fledgling businesses.
To be successful, angel investors need a comprehensive collection of competencies and qualities, and a fair degree of luck as well. They may even need to get involved with the businesses they invest in. Not every founder requires hand-holding, but some businesses will need more assistance than others – particularly those that have encountered strategic challenges or those with sub-optimal capital structures.
Shrewd business angels diversify their portfolios, learning about different industries and themes, effectively protecting themselves if one industry that is hot today blows cold a few years down the line.
Angel investors need to have patience, appreciating that the business manager’s well-rehearsed script of a three to four year growth story followed by a seamless exit rarely happens in real life. At the same time, they need to recognise that fear of missing out can be a very powerful driver, particularly in a post-pandemic world where valuations are moving at such a fast pace.
From an entrepreneur’s perspective, angel investment could benefit their business in a variety of different ways. Angels can often make useful introductions that enable the business to make new contacts, expand their reach, and maybe even find opportunities for exit. In addition, angels can often fund businesses when other lending avenues, such as banks, are less forthcoming for whatever reason – they are, after all, partial owners of the business.
With business angel funding, there is no requirement for founders to have their own collateral. Since leadership will be subject to outside scrutiny, bringing on a business angel encourages discipline. Businesses supported by angel investors not only benefit from their mentoring and management skills, but also from their sector knowledge and industry contacts.
As with other investment channels, angel investment also has its drawbacks from the point of view of the business. This form of funding is not really suitable for investments of less than £10,000, or more than £750,000. It can also take time for businesses to identify and connect with suitable investors. In addition, many entrepreneurs are reluctant to sell down a share of their business in order to secure investment.
From an investor’s perspective, being a business angel offers several benefits. Angel investing can confer solid financial rewards, with one study suggesting that, of 1,100 plus angel exits, the overall return was 2.6 times the original investment over 3.5 years, representing an internal rate of return of circa 27% gross. Compared with other types of equity investment, those returns are impressive, although it is important to look at the details. The same study suggested that 52% of investors lost some or all of their investment capital, with the lion’s share of profits generated by just 7% of exits, suggesting the need for a strategy involving multiple investments.
In addition to financial incentives, investing in early stage companies and helping them to grow can offer a business angel a degree of personal satisfaction. Some angel investors want to support female entrepreneurs, or fellow alumni from their university. Some want to help their communities grow, while others seek alternative types of retirement investment that provide value while diversifying away from stock market volatility.
Investing in early stage companies connects business angels with interesting people with innovative ideas. Angel investors also find themselves rubbing shoulders with fellow investors, creating scope for long-lasting bonds and friendships with like-minded individuals.
Angel investing provides an opportunity for people to support a cause they care about, enabling them to devote their time and funds to the types of businesses that appeal most to them. In addition, unlike some other types of investment, angel investors benefit from the feel-good factor of contributing towards positive change in the world, helping to create life-changing, revolutionary technologies that make a real difference in people’s lives.
