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Funding from Business Angel Investors -- What Startup Founders Should Know

Robert Mollen , Fried, Frank, Harris, Shriver & Jacobson (London) LLP
26 Jul, 2017
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Robert P. Mollen, Counsel at Fried, Frank, Harris, Shriver & Jacobson (London) LLP.

In preparing my blog recently on early stage Venture Capital firms, I found I have never written about how startups can obtain funding from business angels. There is a good reason for that – it is really hard to generalize, even within a single country like the United Kingdom.

That being said, business angel investors can be useful in all sorts of ways, not just for funding, see, so I can’t really ignore the category. Here are some thoughts.

What are business angels?

Business angels generally are high net worth individuals (not necessarily wealthy, but well-off) who have decided to invest in startups. They frequently (but not always) are prepared to invest at an earlier stage than early stage venture capital investors. Consequently, they may be a key source of funding (after self-funding, grants, and friends and family) for you to develop a minimum viable product.

Because business angels are individuals, it can be difficult to generalize about how they identify investments and how best to approach them.

Many business angels are entrepreneurs who have previously exited one or more businesses. As a result, they may bring you experience and expertise as well as money. Angels may be most focused on startups in sectors like their former business where they feel knowledgeable about the sector, or they may just be excited about the opportunities in your sector.

Additionally, the incentives for business angels to invest, and the ways in which they operate, vary significantly from country to country. For example, in the United Kingdom, two tax incentive programs for angel investing, the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS), significantly lower the investment risk profile for business angels, and consequently SEIS/EIS pre-approval is a critical element in attracting UK business angel investment. You don’t need to have a UK company in order to qualify, but your topco does need to have a UK permanent establishment and meet other criteria.

Business angels are frequently grouped with family offices as an investor category. However, they are very different, although there may be some overlap. Family offices, which invest funds for wealthy families, typically involve professional managers who manage portfolios over a wide range of asset classes -- start-up investing is likely to be a very small portion of what they do. Family offices are likely to be able to write a larger check than business angels, and are more likely than business angels to be passive investors.

So what do you need to know about business angels?

Business angels frequently invest in syndicates

While some business angels invest on an individual basis, most who invest in startups on a regular basis do so as part of syndicates with other business angels. Syndicates will usually select a lead angel, who may have relevant sector experience.

As a founder, you will benefit if your business angels select a lead. First, having a lead in place will ease your communications with your angels and make it easier to get things done, although you should still communicate with the group as a whole. Second, your lead angel may be very helpful in the development of your business – through her own expertise, or through the network to which she can introduce you. Of course, your other angel investors may also be able to help in this way, but may be less engaged on a regular basis.

You probably will also find it easier to raise finance from business angels if you can connect with a lead angel who has existing syndicate relationships with other angels. Angels who lack sector expertise may be much more likely to invest if you are able to interest a lead angel with relevant credibility, either in the sector or as a successful investor. Additionally, since most business angels are across many syndicates, an angel who is excited about your business can help to recruit angels that he or she may know from other syndicates.

Angel groups play a key role

A lot of angel investing occurs through angel groups. The angel groups identify and screen potential investments, and may help to identify lead angels. Angel groups frequently sponsor pitching events where potential investee companies that have passed through their screening processes can meet a large group of angel investors. Angel investors are frequently time poor, with businesses or full-time jobs of their own. Consequently, they rely on angel groups to identify relevant opportunities.

Some angel groups use on-line application processes. I’m generally sceptical about contacting financial VC’s through on-line processes, at least without having a warm introduction. My impression, however, is that many angel groups really do rely on their on-line processes for initial screening. Nonetheless, I think a warm introduction, especially if you can get one through an existing angel in the group, really helps.

Some angel groups have special foci, such as particular business verticals, or strategic objectives, such as promoting particular groups (such as women entrepreneurs) or types of investment (such as social impact investment).

Many business angel groups belong to associations, so you can use their association links to help identify them. Examples of these associations include the European Business Angels Network, or EBAN (look for their full members) and the UK Business Angels Association (UKBAA).

Angel investors and equity crowd-funding

If you are considering equity crowd-funding, business angels have a key role to play in your successful crowd-funding campaign.

Equity crowd-funding works best where a significant percentage of the investment round has already been filled at the time that the campaign is launched. Your angel syndicate could fill that role.

Additionally, a lead business angel with sector or general investor credibility can significantly enhance the likelihood of a successful campaign.

Ongoing support from your angel investors

It’s really important to stay in regular contact with your angel investors after they invest. I think a monthly e-mail is best, including some headline financial information. If you have a lead angel, he or she may expect to serve on your board, and in any case is likely to require more detailed information.

Why is your regular communication so important?

First, you should see your angel investors as a group who are really motivated to help you succeed. They hopefully will have relevant experience and contacts. If you tell them your business asks, you may well get assistance.

Second, if you should hit a hard patch, it is best that this not come as a surprise.

Finally, you may well need to go back to your angel investors for supplemental financing, such as a bridge to a venture capital round, so it makes sense to keep them engaged with your business.

My thanks to London Business Angels (part of Newable Ltd) and Angel Academe for much of my education about business angels. However, they bear no responsibility for anything I've gotten wrong!

* * *

This discussion is not intended to provide legal advice, and no legal or business decision should be based on its contents. It reflects the personal views of Bob, and not those of any firm or other organization. If you have any questions or comments, feel free to contact [email protected] or via LinkedIn here.

You will find Bob’s other weekly blogs for emerging and growth companies on US issues, international expansion and early stage financing here:


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