The majority of the self-employed in the UK are working solo in small or medium-sizes businesses, as contractors, consultants or freelancers. And have often funded the transition from employment through preparation and savings or working around full-time employment. This is the community that IPSE has always represented and supported. But what if you’ve also come up with an idea for a new business or start-up which would require more capital to get going? What are angel investors and how could they help?
If you’ve been self-employed for a while, you may have encountered products or services that could be massively improved. Or a new opportunity which isn’t obvious to anyone outside the freelancing world. Angel investors offer an alternative to taking on business loans, or trying to secure investment from large venture capital (VC) firms. And they also get involved with advice and direct support, providing guidance in growing a different type of company from those generally classed as self-employed.
What are angel investors?
An angel investor is an individual, or part of a group, who will want to put money into a business opportunity, and also utilise their own skills and knowledge to help it grow. The most well-known example is the Dragon’s Den TV series, which shows a much more dramatic version of the process with well-known entrepreneurs receiving pitches from applicants.
In reality, discussions tend to be less formal and antagonistic than on television. But angel investors typically look to invest amounts ranging from around £5,000 to £500,000 in early-stage businesses which are exchanged for equity. Along with dividends and the value of their stake in the company, typically angel investors will make money when the business is acquired or goes public.
Angel investors often work together as a syndicate, pooling their money and experience, and relying on a lead angel to coordinate an individual investment opportunity.
It’s important to remember that along with gaining 10-40% of your business, an angel investment also means hands-on involvement, so you may be working closely together for a number of years.
What are the benefits of angel investment?
One of the biggest advantages of angel investment is that unlike a loan, you won’t have to make repayments and accrue interest on the cash injection to your business.
The other main benefit is that you get the involvement of one or more experienced angel investors, including access to their skills, contacts, mentorship, and their existing reputation and credibility. This can all help your business grow, and improve the chances of securing later rounds of investment.
What are the potential problems with angel investors?
This type of investment means you’re selling a significant amount of equity in your business to a third party. And even if you retain a majority controlling stake, they may still try to pressure you into selling prematurely so they can see a return. They could also try to push you into adding staff, moving into a direction you disagree with, or even try to remove you from the company you started.
It’s important for both parties to be clear about their objectives and potential exit strategies from the start, to ensure a good partnership and working relationship.
There will also be a significant requirement for growth and a good return on the original angel investment. This is often expected to be around a tenfold increase in the space of five or six years, which might be much faster than you planned, or are able to achieve.
This not only locks in pressure and expectations for your business, but also for you as an individual.
How to find angel investors in the UK
Along with applying to appear on Dragon’s Den or putting out a call through your existing network, a variety of organisations and schemes exist to help connect entrepreneurs and investors.
These include:
Before approaching any potential angel investors or applying to any funding initiatives, it’s important to have a solid business plan, financial records and projections. You’ll also want to demonstrate some initial evidence of demand for your product or service, and have a compelling elevator pitch, along with a presentation to walk people through your plans.
It’s important to be honest and transparent to find the right fit for investment, and to be prepared to negotiate over the exact terms of any deal. Being patient and finding the best option will be much more beneficial and likely to succeed than rushing into the first potential investor offer you receive.
Don’t overlook the time required for due diligence along with any negotiations, and make sure you understand all of the terms and conditions before agreeing to any deal. This is a long-term commitment which involves selling part of your business based on future success, and it’s essential that everyone understands the objectives, risks and responsibilities involved.
More support for new and early-stage self-employment
Whether you want to bootstrap your way into a sustainable self-employed career, or build a world-changing startup, there are a number of things you can do to get off to a good beginning, and you’ll find advice on them in our section dedicated to those new to self-employment.
You can also find more detailed advice on budgeting, invoicing and debts with our financial wellbeing guidance, and how to scale up your progress with articles on growing your self-employed business.
Looking for more advice? We can help.
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