When an angel investor offers to help, they do so because they see potential in an aspiring entrepreneur or business idea. They provide hope, funding, and support to innovators who might otherwise struggle to find backing for their high-potential -- but untested -- ideas. Their contributions are significant, too; the UK Business Angels Association estimates that on average, angel investors invest £1.5 billion in the UK per year. Often, entrepreneurs also receive the benefit of their investor's business experience, connexions, and industry influence.
The potential for reward is not limited to the entrepreneur, either. Investors who choose to become angels also have the opportunity to mentor up-and-coming entrepreneurs, shape a developing business, and -- hopefully -- receive a significant monetary return on their contribution. For someone with the time, resources, and inclination to help a struggling business find its wings, angel investing might seem like an ideal way to do some good and make some money in the process.
That said, breaking into angel investment isn't as easy as it might sound at the outset, especially if the would-be investor hasn't spent much time in the financial sector. According to a recent report from the British Business Bank, the majority of business angels have eight or more years of experience in investment, and a full 75% are between the ages of 45 and 64. Given that both age and experience would play a role in defining a person's capacity to invest, these numbers are understandable. The same report also noted that there is a growing cohort of younger angels; in 2018, 9% of surveyed investors were between the ages of 18 to 34. This indicates that it is possible to become an angel investor earlier than usual -- however, doing so can be challenging and does require some forethought.
Know the Risks
There is no certainty in the investment world. There is no guarantee that an investor's aims will be achieved, that the startup will execute its business plan, or that the investor will receive any return on their investment at all. As one writer for the international syndicate AngelList puts the matter, "While targeted returns should reflect the perceived level of risk in any investment situation, such returns may never be realised or be adequate to compensate an Investor or a Fund for risks taken.”
Total loss is always possible -- and even if an investment does generate a return, there is no promise that it will appear when an investor wants it. Statistics provided by the UK Business Angels Association suggests that as many as 58% angel deals leave the investor without profit or the stake money they had initially contributed. Factors such as changing economic conditions, revisions in government regulation, and outside technological innovations can render a business obsolete in a matter of months -- and sometimes, there is little to nothing an investor can do to mitigate the loss.
Check Your Basic Qualifications
Not everyone is eligible to become an angel investor. In the UK, aspiring angels must be certified as high-net-worth individuals -- a label which requires them to have either £100,000 or more in annual income or assets in excess of £250,000. Importantly, calculations for the latter do not include the worth of a primary residence or income from pension benefits. If an investor meets these requirements, they can apply for a self-certification.
Those wanting to become an angel investor should take the time to consider how much they want to -- or even can -- dedicate towards an investment. According to the above British Business Bank report, the median initial investment for angels in 2018 was £25,000, and the median follow-on £7,500. Angel investing also demands quite a bit of time; a typical investor spends 1.6 days per week working with an investee and often maintains their focus for six or more years.
It's all well and good if you want to become an angel investor -- but you should ensure that you have the time and resources needed for it before you do.
Decide Your Method for Investing
An angel can choose to invest alone -- but if a would-be investor lacks experience, they might be better served by joining a syndicate.
A syndicate typically includes three or more angel investors and allows those within the group to spread financial risk, enhance their investment capacity, and pool industry expertise. If a new angel joins a syndicate, they have an opportunity to tailor their role in growing a given company. They have the option to take an active position on the board or advise company leaders -- but if they would prefer to step back and allow the lead investor to take on the majority of investment decisions, they can choose to do so. In the end, the decision to join or remain independent is wholly up to the investor's preferences.
Even a new investor has the potential to help a struggling business find its start. If you have the time, resources, and will to invest -- do so! An entrepreneur will certainly thank you for it.