What is an angel investor?

Are you looking to fund your business? An angel investor might be the right option to help you take your first steps and get set up. Learn more about what an angel investor is and what they do for small businesses in this article, including:

• What are angel investors and what do they do?
• Who do they work with?
• How can you find an angel investor?
• Is an angel investor right for you?
• How to understand your business’ finances better

If you’re a limited company director, facing the early challenge of parting with your equity is a tough decision, and having a clear understanding of the health of your business’ finances can help you be more informed as you make it. Find out more about inviting an angel investor into your business and gain insight into your business’ finances below.

An angel investor is someone who invests in businesses at a very early stage, typically to help them get off the ground and establish themselves. Angel investors usually provide a single cash injection into a business at the very start and will help with the development and planning of the business. Angel investors may provide more financing if the business needs it to grow. Their ‘angel’ title is intended as a compliment because they play such a pivotal and early role in helping the business and may also be known as ‘seed investors’.

In return for providing money, angel investors ask for equity in the business, and so angel investors are similar to other venture capital investors. Yet, unlike venture capitalists, angel investors hope to grow their investment (part of your business) for a larger profit margin because they invested earlier. 

Angel investors only work with limited companies as they have equity to sell to investors in the first place. Unfortunately, if you’re a sole trader, this means that this financing option is unavailable to you, though there are other ways you can get funding for your business. 

Learn more in our articles How to finance a business and The best source of finance for small businesses where we weigh up the options for each.

Technically, anyone can be an angel investor: all someone needs is the spare cash for investing. 

You could stumble across an angel investor at a start-up event, be contacted by one on LinkedIn or through an application you’ve made to a UK angel investor network or online platform. However, there is often an expectation that angel investors are experts in business and are qualified to help develop new entrepreneurial ventures. 

Angel investors will ask typical questions about your business, including your idea, your target market, and to justify your business’ evaluation. They may also ask about challenges you’re facing and where you need help. Nevertheless, it’s just as important to do your own research into the credibility and capability of potential investors. You’re selling equity in return, so make sure you receive as much value as possible. 

You can consult a UK register of angel investors on the UK Business Angels Association, find an angel network near you, or search online.

It’s understandable that, if you’re a limited company director, you may be hesitant to give up equity in your company at such an early stage. 

Holding onto equity means you won’t be able to sell it for a higher price at a later stage after you’ve grown your business. Yet, if you don’t sell any equity, you may be stuck for options to fund your business idea. Other routes like crowdfunding can be unreliable, while asking family and friends may not give you what you need, and taking business loans gives your business debt liability. And so, is an angel investor right for you?

It’s important to note that angel investors know that you can’t give up too much of your equity as you may need to sell more later on. Because of this, there is some understanding that angel investors can’t reasonably ask for too much. Particularly because you, as the majority shareholder, need to remain motivated in making your business a success.

Yet angel investors are still seeking a large profit margin, and you should be prepared to negotiate. Similarly, as mentioned before, angel investors can be anyone. Therefore, you’ll need to do your research to make sure the pairing works well. 

Overall, angel investors are prepared to take higher risks on new businesses. They can be a vital source of funding for entrepreneurs, providing potentially hundreds of thousands of pounds before banks or venture capital firms are prepared to. And so, they may be a timely and well-suited option to consider for your business’ success.

Get a better deal on your equity by making sure you understand your business’ financial performance well. Use Countingup to save time and gain deeper insight into your business’ market performance as you source funding for your business.

Countingup is the two in one business current account with free, built-in accounting software. It automates time-consuming bookkeeping admin for thousands of self-employed people across the UK.

The app comes with automatic invoicing tools, expense categorisation, a receipt capture feature and real-time cash flow insights. They work together to help you keep on top of your finances and spend more time focusing on growing your business.

Gain complete confidence in your business’ finances and stand out as a competent entrepreneur to potential angel investors. Find out more here and sign up for free today.